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(REVISED)
SELECT STANDING COMMITTEE ON
BANKING AND COMMERCE
OF THE
HOUSE OF COMMONS
February-July Session, 1924
PRINTED BY ORDER OF PARLIAMENT
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ca
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OTTAWA
oh F, A. ACLAND
PRINTER TO THE KING'S MOST EXCELLENT MAJESTY
: 1924
“App. 1—1924] Price, $1.00
14-15 GEORGE V APPENDIX No. 1 A. 1924
PROCEEDINGS
(REVISED)
OF THE
SELECT STANDING COMMITTEE ON
BANKING AND COMMERCE
OF THE
HOUSE OF COMMONS
February-July Session, 1924
PRINTED BY ORDER OF PARLIAMENT
OTTAWA
F. A. ACLAND
PRINTER TO THE KING’S MOST EXCELLENT MAJESTY
1924
[App. 1—1924]
14-15 GEORGE V APPENDIX No. 1 A. 1924
TABLE OF CONTENTS.
PAGE
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14-15 GEORGE V APPENDIX No. 1 A. 1924
SUB-COMMITTEES §
“McKeown Report” on Home Bank: Messieurs Hanson, Healy, Irvine,
Malcolm, Marler (Chairman), Spencer and Vien.
“Tory Report” on Agricultural Credit: Messieurs Coote, Euler, McKay ‘
(Chairman), McMaster, Shaw, Stevens and Vien.
“Witnesses”: Messieurs Baxter, Cahill (Chairman), Good, Irvine,
Mitchell and Vien.
iv
14-15 GEORGE V APPENDIX No. 1 A. 1924
MEMBERS OF THE COMMITTEE
Hon. W. G. Mitchell, Chairman (c)
Mr. Thomas Vien, Chairman (e)
Baxter, J. B. M. German, W. M. Maybee, M. E.
Benoit, A. J. Good, W. M. Mewburn, Hon. §. C.
Birdssl. WW. Grimmer, R. W. Millar, John
Black, W. A. Guthrie, Hon. H. Mitchell, W. G. (c)
Black, George Hanson, R. B. Morin, L. S. R. |
Boivin, G. H. Harris <'J OH! Papineau, L. J.
Bristol, Hon. E. Hatfield, P. LaC. Porter, E. G. (d)
Cahill, F. S. Healy, A. F. Power, C. G.
Caldwell, T. W. Hodgins, A. L. Rankin, J. P.
Carmichael, A. M. Hudson, A. B. Rhéaume, J. T.
Carruthers, John Hughes, J. J. Robb, Hon. J. A.
Casgrain, P. F. Irvine, W. Robichaud, J. G.
Chaplin, J. D. Jacobs, S. W. Robitaille, Clement
Chevrier, E. R. E. Kellner, D. F. Ryckman, EF. B.
Crick. J. A. Kone. on: J; St. Pére, E. C.
Clifford, L. O. Ladner, L. J. Sales, Thomas
Coote, G. G. Laflamme, J. N. K. Senn, M. C.
Crerar, Hon. T. A. Low; Hon. T. A. or Shaw, oe
d’Anjou, J. E. 'S..B. McBride, T. G. Sinclair, D. J.
Desaulniers, A. L. Macdonald, Hon. E. M. Sinclair, Hon. J. E.
Descoteaux, J. F. Mackinnon, D. A. Speakman, Alfred
Drayton, Sir H. L. Maclean, W. F. Spencer, H. E.
Duncan, M. R. Macphail, Agnes Steedsman, James
Elliott, Preston McCrea, F. N. Stevens, Hon. H. H.
Elliott, Wm. McKay, M. Stork, Alfred
Euler, W. D. (a) McMaster, A. R. Tobin, E. W.
Fafard, J...F. McMurray, Hon. E. J. Vien, Thomas (e)
Fielding, Rt. Hon. W.S. McQuarrie, W. G. Ward, W. J. (f)
Forke, Robert (b) McTaggart, N. H. Woods, R. J.
Fortier, H. A. Malcolm, James Woodsworth, J. S.
Garland, E. J. Marler, Herbert
(a) Replaced Hon. W. G. Mitchell, who resigned as Member of House, May 15, 1924.
(b) Replaced by Mr. W. J. Ward, April 15, 1924.
(c) Resigned as Member of House, May 15, 1924.
(d) Resigned as Member of House, June 27, 1924.
(e) Selected as Chairman, May 20, 1924, to replace Hon. W. G. Mitchell, who had
resigned as Member of House.
(f) Replaced Mr. Robert Forke, Apri] 15, 1924.
14-15 GEORGE V APPENDIX No. 1 A. 1924
ORDER OF REFERENCE
(OTHER THAN PRIVATE BILLs)
Monpay, March 31, 1924.
Ordered,—That the Resolution adopted by this House on Thursday, 27th
March, as follows:—
“That in the opinion of this House, in view of the failure of the Home
Bank and of the fact that official prosecutions and inquiries have been insti-
tuted, including the Royal Commission which has been appointed to investigate
the facts alleged in the petition represented by the depositors of the Bank and
the affairs of the Bank generally; and considering that the evidence received
and to be taken before the several tribunals will be available for consideration,
the Select Standing Committee on Banking and Commerce should be instructed
to consider the provisions of the Bank Act with a view to recommending such
amendments to the Act as will better protect the interests of depositors gener-
ally and will prevent similar occurrences in the future; and also to consider
the report of the Royal Commission in its bearing upon these matters and with
respect to the possibility of saving the Home Bank depositors from loss,” he
referred to the Select Standing Committee on Banking and Commerce for such
action as the Committee may deem advisable.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
Tuespay, April 15, 1924.
Ordered—That the name of Mr. Ward be substituted for that of Mr.
Forke on the Select Standing Committee on Banking and Commerce.
Attest.
W. E:cVORTHRUP,
Clerk, House of Commons.
Turspay, May 6, 1924.
Ordered,—That the Report of Dr. Tory on Agricultural Credits, tabled
on the 15th April, be referred to the said Committee.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
Turspay, May 13, 1924.
Ordered,—That the Select Standing Committee on Banking and Commerce
be authorized to have their proceedings and such evidence as may be taken,
printed from day to day for the use of the members of the Committee and of
the House.
Attest.
W. B. NORTHRUE:
Clerk, House of Commons.
vil
BANKING AND COMMERCE vil
14-15 GEORGE V, A. 1924
Wepnespay, May 14, 1924.
Ordered,—That the said Committee be granted leave to sit while the House
is in session.
Attest.
VW. BNO LERURP,
Clerk, House of Commons.
Turspay, May 20, 1924.
Ordered,—That the name of Mr. Euler be substituted for that of Mr.
Mitchell (resigned) on the Select Standing Committee on Banking and Com-
merce.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
Turspay, May 27, 1924.
Ordered,—That the Minutes of Proceedings and Evidence taken before the
Select Special Committee on Agricultural Conditions last session be referred to
this Committee.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
Tuurspay, June 5, 1924.
Ordered,—That the said Committee be instructed to lay on the table of the
House as part of their sixth Report the minutes and proceedings of all their
sittings during the present session prior to their adoption of the said Report.
Attest.
W. 5. NORTHRUP,
Clerk, House of Commons.
WepNEspDaAY, June 11, 1924.
Ordered,—That the interim Report of the Royal Commission respecting
the Home Bank be referred to the Select Standing Committee on Banking and
Commerce.
Attest.
We. NORTHRUP,
Clerk, House of Commons.
14-15 GEORGE V APPENDIX No. 1 A. 1924
REPORTS
OTHER THAN Private BILLS
(RESPECTING THE REFERENCE)
OF THE
SELECT STANDING COMMITTEE ON BANKING AND
COMMERCE
FIRST REPORT
Private Bills.
SECOND REPORT
Private Bill.
THIRD REPORT
Private Bills.
FOURTH REPORT
Your Committee recommend that they be authorized to have their proceed-
ings and such evidence as may be taken, printed from day to day for the use of
the members of the Committee and of the House, and that Rule 74 relating
thereto be suspended. (Presented, concurrence moved and concurred in, Tues-
day, May 13, 1924. See pages 262 and 264, Votes and Proceedings.)
FIFTH REPORT
Your Committee recommend that leave be granted them to sit while the
House is in session. (Presented, concurrence moved and concurred in, Wednes-
day, May 14, 1924. See page 267 Votes and Proceedings.)
SIXTH REPORT
Your Committee recommend that the Order of Reference be enlarged so as
to embrace the study and consideration of the purpose, organization and opera-
tion of some type of properly administered Central or Reserve Bank. (Pre-
sented, concurrence moved, objected to, Wednesday, May 21, 1924. See pages
295 and 297, Votes and Proceedings. Concurrence moved, lost on division,
Wednesday, July 2, 1924. See page 471, Votes and Proceedings.)
SEVENTH REPORT
Your Committee recommend that the Minutes of Proceedings and Evidence
taken before the Select Special Committee on Agricultural Conditions, of last
session, be referred to the Select Standing Committee on Banking and Com-
merce. (Presented, concurrence moved, concurred in, Wednesday, May 27, 1924.
See pages 326 and 327, Votes and Proceedings.)
EIGHTH REPORT
Private Bill.
NINTH REPORT
Private Bills.
1x
x SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
TENTH REPORT
That pursuant to the Order of Reference from this House of the 31st March,
1924, your Committee, in view of the failure of the Home Bank, have con-
sidered the provisions of the Bank Act with a view to recommending such
amendments to the Act as would better protect the interests of bank depositors
generally, and would prevent similar occurrence in the future;
And your Committee are of the opinion that it is expedient to bring in a
measure to amend the Bank Act and they therefore recommend that the said
Act be amended as follows:—
That Section 56A of the Bank Act be repealed, and the following sub-
stituted therefor:—
Inspection:
56A. 1. “ The Governor in Council on the recommendation of the Minister
shall appoint a person who in his opinion has had proper training and experi-
ence who shall be charged with the performance of the duties hereinafter
mentioned. Such person shall be designated ‘Inspector General of Banks.’
The Minister may direct some other such person to temporarily perform the
duties of the inspector should the inspector, by reason of illness or other con-
tingency, be unable to perform such duties.”
2. The Inspector shall hold office during good behaviour, but may be
removed from office by the Governor in Council for misbehaviour or incapacity,
imability, or failure to perform his duties properly.
3. If the Inspector is removed from office for any such reasons the Order
in Council providing for such removal and documents relating thereto shall be
laid before Parliament within the first fifteen days of the next ensuing session.
4. The Inspector while holding office shall not perform any service for
compensation other than the service rendered by him under the provisions of
this section.
5. “ The Minister may appoint or employ on the recommendation of the
Deputy Minister of Finance and the Inspector, such persons with training and
experience and such clerical assistance as may be deemed necessary to carry
cut and give effect to the provisions of this section. Persons so appointed or
employed shall receive such salary or remuneration as may be fixed by the
Minister.”
6. The Inspector, from time to time, but not less frequently than once in
each calendar year, shall make or cause to be made, such examination and
inquiry into the affairs or business of each bank as he may deem to be neces-
sary or expedient, and for such purposes to take charge of the assets of the
bank or any portion thereof, if the need should arise for the purpose of satis-
fying himself that the provisions of this Act having reference to the safety of
the creditors and shareholders of each such bank are being duly observed and
that the bank is in a sound financial condition. The Inspector at the conclusion
of each such examination and inquiry shall report thereon to the Minister.
7. A copy of all reports made by the auditors of a bank to the General
Manager and to the Directors under the next preceding section shall be trans-
mitted or delivered to the Minister by the auditors at the same time as such
reports are transmitted or delivered to the General Manager and Directors.
8. The Inspector, or person acting under his direction, shall have a right
of access to the books and accounts, documents, vouchers and securities of the
bank, and shall be entitled to require and receive from the directors, officers
and auditors of the bank such information and explanation as he may deem
necessary for the performance of his duties.
9. The Inspector shall have all the powers conferred upon a Commissioner
appointed under the Inquiries Act for the purpose of obtaining evidence under
BANKING AND COMMERCE xl
APPENDIX No. 1
oath, and may delegate such powers as occasion may require. Any person who
refuses to give such evidence or to produce any book or document material
thereto when required so to do shall be guilty of an offence against this Act.
10. Whenever the Inspector is satisfied that a bank is insolvent he shall
report fully on the bank’s condition to the Minister and the Minister may,
without waiting for the bank to suspend payment in specie or Dominion notes
of any of its liabilities as they accrue, request the Association or the President
of the Association to appoint a curator to supervise the affairs of such bank,
and such request shall have the same effect as if the bank had suspended pay-
ment in specie or Dominion notes of any of its liabilities as they accrued, and
a curator shall forthwith be appointed as provided in section 117 of this Act.
11. The Inspector shall be paid a salary fixed by the Governor in Council
on the recommendation of the Minister.
12. All salaries, remuneration and other expenses incidental to giving effect
to this section shall be paid out of the Consolidated Revenue Fund, and the
Consolidated Revenue Fund shall be recouped after the end of each calendar
year for such outlay by an assessment upon the banks based upon the average
total assets of the banks respectively during the year, as shown by the monthly
returns made by the banks to the Minister under section 112, and such assess-
ment shall be paid by the banks.
13. All persons appointed under this section shall be officers of the Depart-
ment of Finance, but the provisions of the Civil Service Act, 1918, shall not
apply to such persons.
14. Any bank or any director, president, general manager or any officer of
a bank who directly or indirectly makes a loan or grant or gives any gratuity
to the Inspector or any other person appointed or employed under this section,
and the Inspector or any such person who accepts or receives, directly or
indirectly, any such loan, grant or gratuity, commits an offence against this
Act, and is lable as provided in section 157 of this Act, in addition to any
punishment otherwise provided.
15. The Inspector or any person appointed or employed under this section
who discloses to any other person, except the Minister and the Deputy Minister
of Finance, any information regarding a bank, its business or affairs commits
an offence against this Act and is liable as provided in section 157 of the Act.
16. Provided, however, that the Government shall not incur any liability
whatever to any depositor, creditor or shareholder of any bank, or to any other
person, for any damages, payment, compensation or indemnity which he may
suffer or claim by reason of this section or anything therein contained, or by
reason of anything done or omitted to be done under the requirements thereof,
or by reason of anything omitted to be done which is hereby required to -be
done, or by reason of any order or discretion of the Governor in Council or of
the Minister in the execution or administration of the powers of any of them
by this section conferred, or by reason of any failure or omission on the part of
the Governor in Council or of the Minister or of the Inspector, or of any officer
or employee of the Government to execute or discharge any power, authority or
duty thereunder, or otherwise by reason of any default, negligence, mistake,
error or omission in the administration or discharge of the powers or duties
which in any circumstances are by this section intended or authorized to be
executed or performed; and no such payment, damages, compensation or
indemnity, nor any claim therefor, shall in any case be authorized, paid or
entertained by the Government.
17. This section shall come into force on the first day of October, nineteen
hundred and twenty-four, but it shall not be incumbent upon the Inspector to
examine all of the banks under the section during the calendar year one
thousand nine hundred and twenty-four.
xii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
(Presented, Friday, June 20, 1924. See pages 423, 424, 425, Votes and
Proceedings. Concurrence moved, concurred in, Monday, June 23, 1924. See
page 432, Votes and Proceedings.)
ELEVENTH REPORT
Your Committee have had under consideration the Order of Reference from
this Honourable House, dated 31st March, 1924, which reads as follows:—
“That, in the opinion of this House, in view of the failure of the
Home Bank, and of the fact that official prosecutions and inquiries
have been instituted, including the Royal Commission which has been
appointed to investigate the facts alleged in the petition represented by
the depositors of the Bank and the affairs of the Bank generally; and
considering that the evidence received and to be taken before the several
tribunals will be available for consideration, the Select Standing Com-
mittee on Banking and Commerce should be instructed to consider the
provisions of the Bank Act with a view to recommending such amend-
ments to the Act as will better protect the interests of depositors gener-
ally and will prevent similar occurrences in the future; and also to
consider the report of the Royal Commission in its bearing upon these
matters and with respect to the possibility of saving the Home Bank
depositors from loss,” be referred to the Select Standing Committee on
Banking and Commerce for such action as the Committee may deem
advisable.
And also the Order of Reference dated 11th June, 1924, reading as follows:—
“That the Interim Report of the Royal Commission respecting the
Home Bank be referred to the Select Standing Committee on Banking
and Commerce.”
Your Committee have sat from time to time, and have studied the Interim
Report on the Home Bank submitted by Mr. Chief Justice McKeown and the
evidence therein referred to.
Your Committee consider that the facts therein brought out and the
evidence therein referred to clearly establish that the depositors of the Home
Bank have no claim under the law of the land for compensation by the country
on account of any loss they may suffer by reason of the failure of the Home
Bank.
But your Committee are also of the opinion that, in view of the representa-
tions made to the Department of Finance in the years 1916 and 1918, the
Government of the time could have made in 1916 and in 1918 an effective audit
under Section 56A of the Bank Act, and if such an effective audit or thorough
investigation into the Bank’s affairs had been made it would have resulted:—
1. In the immediate liquidation of the bank, or
2. Its amalgamation with another bank, and that the effect would have
been, no loss to the depositors in 1916 or 1918.
Your Committee have studied the evidence given before the Royal Com-
mission by Sir Thomas White, who was then Minister of Finance, and particu-
larly his statements: “I would never think of putting in a special auditor in a
bank and taking chances, especially at a time like that, of closing the bank”’
(page 345); and further: “ Under no circumstances would I have allowed a bank
to fail during the period in question. I had many difficult and dangerous finan-
cial situations to deal with during the war. At its outbreak, in view of the
panic which prevailed, the Government, at my instance, placed itself behind
the banks of Canada and gave public assurance that it would loan them such
sums as they might require to meet the conditions of the war, and would take
BANKING AND COMMERCE xil
APPENDIX No. 1
all further steps necessary to safeguard the financial situation during its con-
tinuance”’ (page 359); and further: “ The action I took was in my discretion;
in exercising his discretion, a Minister must have regards to conditions, because
conditions have a direct bearing upon the consequences attendant on his action
to the bank and the general situation. If you make a mistake in putting in an
auditor, in peace time the consequences may be a run producing little effect
upon the bank; if in war time, you may bring down the bank and, in addition,
you may cause an unspeakable calamity to the country” (page 743).
Your Committee is not called upon to question the manner in which Sir
Thomas White made use of the powers given to him, or whether he exercised
his discretion correctly or otherwise.
Your Committee consider that the facts brought out in the Interim Report
submitted by Mr. Chief Justice McKeown, and the evidence therein referred to,
establish that the depositors of the Home Bank have a moral claim in equity
for compensation by the country on account of any loss they may suffer by
reason of the failure of the Home Bank.
(Presented, Tuesday, July 1, 1924. See page 463, Votes and Proceedings.
Concurrence moved, concurred in, Thursday, July 17, 1924. See page 585,
Votes and Proceedings.)
TWELFTH REPORT
Your Committee recommend that the Government should study and con-
sider the practicability of laying before Parliament at a subsequent date the
establishment in the chartered banks of Canada of an additional class of savings
account whereby all holders of deposits, who may place their money in such
class of accounts, in any one bank or branch thereof, shall be protected
against loss up to the sum of $3,000 by the establishment of a fund on an
insurance basis, the premiums of which will be contributed by the depositor
and the bank in such proportion as may be determined and that the Govern-
ment work out the details and actuarial data necessary for the establishment of
the said proposal and upon conference with the banking institutions of Canada,
that legislation may be enacted to carry out the results of the said conference
and such scheme as may be evolved.
(Presented, Friday, July 4, 1924. See page 485, Votes and Proceedings.
Concurrence moved, concurred in, July 15, 1924. See page 562, Votes and
Proceedings. )
THIRTEENTH REPORT
Your Committee, pursuant to the Order of Reference, dated 6th May. 1921,
reading as follows:—
“ Ordered,—That the Report of Doctor Tory on Agricultural Credits,
tabled on the 15th April, be referred to the said Committee.
Attest.
Win NOG RE ELLE.
Clerk, House of Commons.
have had under consideration the report of Dr. Tory on Agricultural Credits.
Said report shows that, of the nine provinces of Canada, seven already
have on their statute books laws for the purpose of establishing public systems
of agricultural credit; and
Whereas a study of the systems existing in these provinces shows that there
is considerable variation in the systems, both as to method and detail; and
Whereas it is the purpose of all such rural credit systems to secure, through
the better organization of security, loans for agricultural purposes at better
rates of interest than have been current heretofore; and
Xlv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Whereas it is doubtful if this purpose could be best served by the estab-
lishment of a Federal System operating in the above mentioned provinces in
addition to and in competition with the systems already in existence or in pro-
vinces where the need has not been sufficient, in the opinion of the provinciai
authorities, so as to justify the establishment of such a system; and
Whereas it would seem to be wise, both from the point of view of efficiency
and economy, if a Federal System is to be established, that it be a common
system for the whole of Canada, and that, of necessity, would entail confer-
ences between the federal and provincial authorities;
Therefore, your Committee recommend that the investigation of the subject
be continued, in order to determine whether it be possible to co-ordinate the
various systems of rural credit now in existence into a Federal System,
applicable to the whole of Canada, and that legislation be prepared based on
the said further investigations and calculated to meet the credit needs of the
agricultural classes of the Dominion, and submitted to Parliament at its next
session.
(Presented, Wednesday, July 9, 1924. See page 507, Votes and Proceed-
ings. Concurrence moved, concurred in, Friday, July 18, 1924. See page 648,
Votes and Preceedings.}
FOURTEENTH REPORT
Your Committee recommend that Subsection (f) of Section 76 of the Bank
Act be amended by striking out all the words after the word “be” in the
fifth line thereof and substituting therefor the following: “ without the unani-
mous approval of the directors present at a regular meeting of the board or
meeting specially called for such purpose, provided that the notice calling any
such regular or special meeting shall set out specifically such aforementioned
purpose.”
(Presented, Wednesday, July 9, 1924. See page 508, Votes and Proceed-
ings. See also pages 544 and 545, Votes and Proceedings.)
FIFTEENTH REPORT
Private Bill.
SIXTEENTH REPORT
Your Committee have had under consideration the various matters referred
tc them by the Order of Reference, and have reported on same from time to
time.
Your Committee, in addition to numerous meetings of the sub-committees,
have held thirty-nine sittings on twenty-seven separate days, have heard the
evidence of ten witnesses, and have had twenty-three exhibits filed with them.
Your Committee submit herewith for the information of the House a
printed copy of their proceedings, the evidence given before the Committee,
and also certain documents submitted to the Committee as exhibits, but not
contained within the proceedings.
Your Committee recommend that the Order of Reference, Reports, Pro-
ceedings, and the evidence given before the Committee, together with a suit-
able index to be prepared by the Clerk of the Committee, be printed as an
appendix to the Journals of the House of the present session, and for distribu-
tion, and that Rule 74 be suspended with reference thereto.
(Presented, Thursday, July 10, 1924. See page 517, Votes and Proceed-
ings. Concurrence moved, concurred in, Friday, July 11, 1924. See page 542,
Votes and Proceedings.)
BANKING AND COMMERCE XV
APPENDIX No. 1
SEVENTEENTH REPORT
Your Committee have had under further consideration and study the report
of Dr. H. M. Tory on “Agricultural Credit,” which was referred to them on
May 6, 1924.
Your Committee find that the credit of persons engaged solely in farming
or the tillage of the soil is affected by certain provisions of The Bankruptcy Act.
Your Committee, therefore, recommend that legislation be introduced at
the present Session of Parliament amending The Bankruptcy Act as follows:—
“An Act to Amend The Bankruptcy Act.
“1. This Act may be cited as ‘The Bankruptcy Act Amendment Act, 1924.’
“2. The Bankruptcy Act is amended by inserting after section 8B thereof
the following section :—
“8C (1) Notwithstanding anything contained in this Act, if the Lieutenant-
(sovernor in Council of any province has authorized any officer of the pro-
vincial government, charged under a provincial statute with duties which in the
opinion of the Lieutenant-Governor in Council are analogous in any respect to
the duties of custodian and trustee, to act as custodian and trustee under this
Act, the Official Receiver shall in the case of an assignment by a person engaged
solely in farming or the tillage of the soil appoint such officer as custodian.
“ (2) Any officer so appointed to the office of custodian by the Official
Receiver shall thereupon in addition to such office be and be deemed to he the
authorized trustee as if appointed under subsection (1) of section 15 of this
Act, and shall continue to be the authorized trustee until properly removed
under subsection (2) of the said section 15.
“ (3) In case any such provincial officer is appointed custodian and trustee,
he shall not be entitled to be paid any remuneration as custodian or trustee nor
any of the costs enumerated as costs of custodian in Part III of the General
Rules, but shall be entitled to his lawful disbursements.
3. Section 59 of The Bankruptcy Act is hereby amended by adding thereto
the following subsection :—
“ (2) Paragraphs “6b” and “c” of the preceding subsection shall not apply
in the case of an application for discharge by any assignor who at the time of
the authorized assignment was engaged solely in farming or the tillage of the
oil.”
(Presented, Friday, July 11, 1924. See page 523, Votes and Proceed-
ings.)
BANKING AND COMMERCE XVil
APPENDIX No. 1
ROYAL COMMISSION re HOME BANK
INTERIM REPORT
To His Excellency General the Right Honourable Lord Byng of Vimy, G.C.B.,
G.C.M.G., M.V.O., Governor General and Commander-in-Chief of the
Dominion of Canada.
In compliance with the Commission of Your Excellency dated the 27th
day of February, 1924, by which I was appointed a Commissioner to make
investigation into all material and relevant facts in relation to the Orders in
Council attached to the above-mentioned Commission, I have the honour to
submit the following interim report.
This report does not contemplate a consideration of all the matters
referred to, but has to do with such of them as have a bearing upon the facts
alleged in a petition presented to Your Excellency by an executive committee
of the depositors of the Home Bank of Canada, dated the 23rd day of Feb-
ruary, 1924, praying that those who suffered loss as such depositors because of
the facts set out in the said petition, should be indemnified against such loss
on grounds set forth.
The hearing in the matter was commenced before me in the city of Ottawa
on the 16th day of April last, and evidence was taken under oath both at Ottawa
and at Toronto on divers days between that date and the 20th day of May,
1924, inclusive; Mr. E. Lafleur, K.C., and Mr. H. J. Symington, K.C., appear-
ing throughout as counsel for the Government of the Dominion of Canada;
Mr. H. J. McLaughlin, K.C., Mr. A. G. Browning, K.C., and Mr. W. T. J. Lee
appearing for the depositors during the continuance of the hearing; and in
addition to the above-named counsel, Sir Thomas White, K.C., Mr. McGregor
Young, K.C., and Mr. R. A. Reid appeared for different interests from time to
time.
In view of the questions raised and argued before me during the investiga-
tion, it is well, I think, to clearly define the proper range of the present inquiry,
as limited by the Orders in Council under which I am directed to act. No
ambiguity attaches to them, and it is my duty to confine myself circumspectly
to the letter of the instructions received.
I am the more desirous of doing so, inasmuch as the courts of the province,
on their civil and criminal sides, are concerned with the conduct of many of
those whose names have been mentioned in the testimony adduced before me,
and actions both civil and criminal have been commenced against some of them.
Regard for the obvious proprieties of the situation, demands complete reticence
on my part concerning the issues which have been thus judicially raised and as
to which the proper tribunals are now making inquiry. While some reference
to their acts as such directors was unavoidable during the taking of the evid-
ence, such reference was made for the most part wholly ancillary to the
pearion’ claim, and in explanation of the grounds upon which this claim is
ased.
I am further particularly concerned to confine myself strictly to what I
am now directed to do, since it is said that the Parliament of Canada may be
asked to take certain action in respect of the petition filed by the depositors,
and I appreciate how jealously the frontiers of parliamentary responsibility
and action are guarded. I do not consider that the commission requires me to
set foot over that line. I am asked to answer these questions, and whether the
findings of fact involved in such answers be accepted or not, or whether any
le
XxViil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
action may be taken upon them, is not for me to say. While I realize that I
have permission to express an opinion on the result of the investigation and the
evidence taken, I recognize that the responsibility for any action thereon really
lies elsewhere, and those who carry that burden should, I think, approach their
task unaffected by the expression of any opinion on my part. My duty, as I
see it, is simply to put them in possession of definite answers to the questions
submitted, as best I may. I have been urged by certain of the counsel to say
that in my opinion compassionate allowance should be made to the depositors
who have suffered loss, and also to pronounce what would amount to a finding
of negligence on the part of some responsible for the administration of the
Department of Finance in its oversight of the bank. While my right to dis-
cuss the discretionary acts of a minister of the Crown, where no dishonesty is
alleged, has been sharply challenged by other counsel, on the ground that the
jurisdiction therein abides with Parliament itself, nevertheless I have been
further invited to express an opinion upon the diligence and honesty of adminis-
trative acts. But in strictly confining myself to answering the questions set
out in the Orders in Council, I am constrained to lay aside any inquiry into
matters suggested immediately above and to refrain from comments upon facts,
concerning which various counsel have asked that pronouncement may be made,
especially regarding the conduct of ministers of the Crown responsible for the
administration of the department immediately involved.
While it would, I think, be impossible for one to follow the evidence and dis-
cussion without forming an opinion, and perhaps a strong opinion, upon the
questions so raised, yet the expression of such opinion, to my mind, would serve
no useful purpose, but rather cloud the direct issues to which I am commanded
to give attention. It may be that other matters related to the Home Bank will
be explored later, as coming within Order in Council number 412, directing the
commissioner to investigate:—
“the affairs of the said bank during the whole interval between the
issue of the bank’s charter and the failure of the said bank ”’ etc.,
but in this interim report I am confining myself solely to the task of finding
answers to the questions set out in the Order in Council number 306, which
questions are as follows:—
“1. Whether, in the years 1915, 1916 and 1918, representations were
made to the Department of Finance of the Dominion of Canada respecting
the condition of the Home Bank of Canada, and, if so, what representa-
tions were so made.
‘““2. Whether, if such representations were made, a state of affairs
was revealed concerning the condition of the said bank such as would
have justified an investigation under the powers conferred upon the Min-
ister of Finance by section 56A of the Bank Act.
“3. What action if any was taken by the then Minister of Finance
upon such representations as may have been made.
“4. What effect would an audit under section 56A of the Bank Act
if made in 1915, 1916 and 1918 have had upon the conduct of the affairs
of the said bank and upon the position of the present depositors.
“5. What was the financial condition of the said Home Bank of
Canada in the years 1915, 1916 and 1918, respectively, and what steps, if
any, could have been taken by the Government to save the situation.”
Adhering to the course indicated above and in compliance with what I con-
sider to be the directions of the commission in this regard, I desire to state
specifically my answers to the questions above set out.
BANKING AND COMMERCE xix
APPENDIX No. 1
Question 1 is as follows:—
“1. Whether, in the years 1915, 1916 and 1918, representations were
made to the Department of Finance of the Dominion of Canada respect-
ing the condition of the Home Bank of Canada, and, if so, what repre-
sentations were so made.”
It will be observed that this question contains two component inquiries:—
First, whether during the years mentioned any representations were made,
’ and,
Second, if such representations were made, of what nature were they?
I think it was established by the evidence that in the year 1915 no repre-
sentations were made to the Department of Finance respecting the condition of
the bank.
With equal clearness it is apparent that during the year 1916 such repre-
sentations were actually made to the Department of Finance. They are evidenced
by exhibits submitted and filed numbered from “2” to “42” inclusive. These
exhibits show that such representations originated from Messrs. T. A. Crerar,
John Kennedy and John Persse, who then were directors of the Home Bank,
residing in Winnipeg. In these communications, as well as in many others,
Messrs. Crerar, Kennedy and Persse are termed “ the western directors,” and it
is clear that originally they assumed such position with a view especially of
scrutinizing the operations of the bank in Manitoba and the western provinces of
Canada. Such representations took the form of three separate communications
to the then Minister of Finance, each bearing date the 22nd day of January,
1916, the first of which in order of filing is headed: —
(Gx 2. pird2).
“ Re Home Bank of Canada.
Re Prudential Trust Loan.
Confidential memorandum to the Minister of Finance.”
It is signed thus:—
“ James Fisher,
For Western Directors.”
The second communication is headed:—
(Gx. 30.1).
“ Re Home Bank.
Confidential memorandum re Barnard loan.”
and is also signed :—
“ James Fisher,
For the Western Directors.”
The third communication is headed:—
Chis OL, 1. Lc Jy
“ Re Home Bank of Canada.
Confidential memorandum to the Honourable, the Minister of Finance,
from Messrs. Crerar, Kennedy and Persse, Directors of the Home
Bank residing in Winnipeg.”
and is signed :—
“ James Fisher,
On behalf of and by instructions of the three Western Managers.”
There are contained in the communications themselves, as well as in the
accompanying statements attached, particulars concerning various loans and
complaints about the way the bank’s business was being transacted and other
matters which will be detailed as far as necessary in answer to the second part
1—23
XX SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
of this question. There were also submitted to the Minister of Finance at that
time, accompanying such communications, many letters written by and on behalf
of the western directors, and replies thereto, covering the period extending from
the 17th day of February, 1915, to the 18th day of January, 1916
From all this correspondence it is apparent that in the year 1915 the affairs
of the bank were under criticism on the part of the western directors, and that
they were making complaints to the eastern directors concerning certain loans
and the general lack of oversight and proper care that existed, and this is
especially evidenced by the communication of February 17, 1915, by Messrs.
Crerar, Kennedy and Persse to A. C. Macdonell, M.P. (ex. 10, p. 24).
The letters which passed between the western and eastern directors, of the
year 1915, are attached to the file brought to the attention of the department
in the year 1916, and admittedly came under the attention of the Minister of
Finance at that time.
It is therefore abundantly clear that as far as the year 1916 is concerned, it
must be reported that representations were made to the Department of Finance
a the Dominion of Canada respecting the condition of the Home Bank of
anada.
The same answer must be made as regards the year 1918, for all the com-
munications and documents above referred to were again brought to the atten-
tion of the Minister of Finance in the year last mentioned and he received
further representations concerning the condition of the bank by way of a com-
munication from Mr. W. A. Machaffie, for many years an official of the Home
Bank. The contents of these communications will be referred to in answer to
the second part of this question. :
In addition to the above, there were also interviews during the years men-
tioned between the then Minister of Finance and the president and other direc-
tors of the bank as well as with Mr. Z. A. Lash, counsel for the Home Bank.
Summing up what is above written as regards the first part of question
number 1, I repeat that no representations were made to the Department of
Finance of the Dominion of Canada respecting the condition of the Home Bank
during the year 1915; but that such representations were made to the Depart-
ment of Finance during the year 1916, and during the year 1918.
Turning now to the second part of this question, which asks what repre-
sentations were made:—It is to be noted that they take the form of three special
memoranda, each bearing date the 22nd of January, 1916, and signed by James
Fisher for or on behalf of the western directors (ex. 2, p. 12; 3, p. 15; and 5,
p. 17). Of these, one is more general in its character and will be referred to
first in order (ex. 5). It drew to the attention of the Minister the fact that out
of a paid-up capital of not quite two millions of dollars, about $500,000 was held
in the West; that a few years then previous, three western stockholders were
placed on the board of directors to deal with the western business; that they
met weekly and reported regularly their action to the head office. No eastern
director met with them, and none of the three attended the head office meeting
in Toronto unless specially requested. Also that in the fall of 1914 the western
members became apprehensive that the business of the Toronto branch was not
in good condition whereupon they went to Toronto about the middle of Novem-
ber of that year, for the purpose of acquainting themselves with the condition
of affairs of the home branch, as well as to make complaint of the lack of money
for loans in their part of the country; that upon their request meetings of the
directorate of the bank were at once called, lasting for four days, during which
they for the first time learned that there was no regular inspection of the
Toronto office, the reason alleged being that the business there transacted was
under weekly supervision by the eastern members of the board. The complain-
ants set out that they were not satisfied with the information furnished at these
BANKING AND COMMERCE XX1
APPENDIX No. 1
meetings, especially as to certain accounts, one of which on the first day of
meeting was reported at the figure $1,100,000, but on the second day an error
was admitted to have been made, and the amount was raised to $1,500,000, and
on the third day it was placed at $1,780,000; and concerning which loan it
appears that even the largest figure given was too small, for at the meeting on
the 30th of the following month, it was disclosed that the amount involved was
nearly two millions of dollars. They also learned that the general manager was
indebted to the bank in a sum first reported as $35,000, and which was after-
wards disclosed to be $76,000, and the like situation existed regarding other
customers (ex. 10, p. 24). It was further represented to the minister that
although they had urged an immediate inspection of the Toronto office, and that
the report be ready for the next annual general meeting, it was not ready at that
time, and the annual report of the bank had been sent to Ottawa without the
western directors knowing of its contents. Also that they refused to acknowledge
the validity of the election of Messrs. Barnard and Haney to the board of direc-
tors, in the place of Messrs. Gooderham and McNaught, who had resigned, and
the western directors notified the manager that they held themselves free to
contest the validity of these elections (ex. 9, p. 23). Another matter of com-
plaint was that at the December meeting a resolution had been submitted and
approved to the effect that a committee be appointed consisting of the assistant
general manager and two others to carry on the affairs of the bank, and to
specially pass upon all credits and make every possible effort to collect all
overdue loans, and submit the earliest possible statement showing the present
condition of the bank, with recommendations, which resolution was not pressed
to its passage as the general manager was at that time out of the country in
ill-health, but it had been agreed that this course would be taken, but the agree-
ment was ignored and nothing done pursuant to these plain directions (ex. 10,
p. 25).' This communication was of a general nature, and in that sense supple-
mentary to the particulars set out in the other two accompanying memoranda
referred to below, but all the matters above noted were contained therein, and
In accompanying exhibits, and thereby brought to the attention of the Minister
of Finance.
The memorandum filed as exhibit number 2 is of the same date and has
reference to the loan made by the bank to the Prudential Trust Company. The
facts laid before the minister in this document showed that the bank had parted
with $500,000 in a transaction involving the Prudential Trust Company and the
New Orleans Southern and Grand Isle Railway Company, which was explained
by the general manager in a communication to Mr. Crerar, under date of Decem-
ber 24, 1915 (ex. 31, p. 53), part of which reads:—
“ James Mason to T. A. Crerar
“Messrs. Warren, Bristol and Morden were the promoters of the
reorganized New Orleans Southern and Grand Isle Railway Company, and
as such made application to the Prudential Trust Company, Limited, for a
loan of $500,000, which the trust company agreed to make, provided
the bank would advance to the trust company the necessary funds. It
was afterwards discovered by the solicitor for the trust company that
under its charter it could not make the advance, but could accept the
funds from the bank for investment by way of loan to the railway com-
pany and that the trust company could guarantee repayment to the bank—
there was no connection between Warren, Bristol and Morden and the
bank—their dealings being direct with the trust company.”
There is a feature of this loan upon which I desire to make no comment,
but feel it necessary to state, and that is, that apparently, preliminary to the
Xxil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
oan being made by the bank, a like sum of $500,000, being trust funds of one
of the provinces, then in the hands of the Prudential Trust Company, was
deposited in the Home Bank. It was considered by certain of the directors that
in some way these funds would be security for the loan to the trust company,
but obviously such could not be the case, and on reference to the bank’s solicitor,
advice to that effect was obtained. The security taken for this loan was a note
signed by the Prudential Trust Company in favour of the Home Bank of Canada,
and $750,000 of bonds of the railway company as collateral security. Now this
loan represented a very large proportion of the bank’s capital, and the western
directors whose amounts for western accommodation were being curtailed, were
unsparing in their criticism of the transaction. The exhibits show a great deal
of activity concerning this loan; the trust company made no effort to repay it,
and the same may be said of the railway company.
Their third communication to the minister (ex. 3, p. 15), deals with a loan
to C. A. Barnard, who had become a director of the bank, and concerning whose
election the western directors protested, as above referred to. It sets out that
from the report of the inspector of the Toronto office made in June, 1915, it
appears that C. A. Barnard was indebted to the bank in the sum of $394,000,
and that 2,622 shares of Home Bank stock were held in the name of Barnard
and Pellatt in trust. The inspector pointed out that there was no trust deed
held concerning these shares, and that they would have to realize about 125 per
cent to enable the bank to avoid a loss. It will be shown a little later that in
addition to these three large amounts other individuals and companies were
shown to be indebted to the bank in sums wholly disproportionate to the bank’s
assets, but in their first communications the western directors called the atten-
tion of the minister to these three large accounts then representing more than
the whole paid up capital of the institution. They complained as to the Barnard
loan that they never could get any satisfactory explanation of the transaction;
that it had been explained by Col. Mason at the November meeting in 1915 that
it was connected with the taking over of the Banque Internationale, but how it
came to be made or what its object was, complainants say they could not
ascertain; neither could they understand, nor were they informed, as to the
relationship of the bank shares to the loan in question; and by the submission
of these three accounts and others mentioned in the exhibits, they brought the
attention of the department to the condition of the bank. I do not conceive it
to be my duty to enter into detailed history or explanation concerning these
loans; I am answering the question as to what the representations were, and it
is apparent that the existence of three accounts, viz: the Prudential Trust Com-
pany, C. A. Barnard, and the A. C. Frost Company, involving at that time the
withdrawal from circulation of over two and a half millions of dollars of the
bank’s funds (ex. 4, p. 16, and 35 p. 59), upon which no interest was being paid,
and to some of which addition was being made from time to time, was relied on
by the western directors in their complaint against the bank management.
They further showed that by a statement placed before the board of directors
at the meeting in September, 1915 (ex. 4, p. 17), the Barnard account and the
Prudential Trust Company account, and other accounts mentioned below, had
been increased from December 31, 1914, and August 31, 1915, in the amount of
$192,849.30. Increases involved in the A. C. Frost Company account and the
Pellatt & Pellatt account were responsible for the greater part of this sum and
except incidentally in the statement of increases mentioned above, the indebted-
ness of the last named firm was not placed before the minister in the year 1916.
This branch of question number 1 is two-fold:—
First, as to what representations were made in 1916; and,
Second, what representations were made in 1918. Coming now to the repre-
sentations made in the year 1918, it will be observed that everything that was
placed before the department in 1916 was still available, as well as an addi-
BANKING AND COMMERCE XXlii
APPENDIX No. 1
tional representation contained in the letter of Mr. W. A. Machaffie, who signed
himself “ Late assistant to the president ”; and under date of August 29th, 1918
(ex. 88, p. 178) communicated certain very important facts concerning the con-
dition of the bank to the then Minister of Finance, by registered mail. He
drew the reports of Mr. Fisher, made in February, 1916, to the Minister’s atten-
tion, and also referred to the A. C. Frost account—which will be mentioned
below—as well as to certain shipbuilding transactions in which he alleged that
the bank, as well as the president and one of the directors, were interested with
a Mr. Stewart whom he described as a personal friend of Mr. Haney, the vice-
president; he made the serious charge that the dividends which had been
declared during the years 1916 and 1917 had been based on the addition of
interest to doubtful accounts; that section 153 of the Bank Act had been
violated; and that Home Bank officials, unwilling to share in what he termed
the “ guilt” of making false returns, were obliged to resign; that the auditor
who had the affairs of the bank under examination was incapable of filling that
position; that information was withheld by the officials of the bank from their
counsel, Mr. Lash. Taken as a whole, the nature of this communication was
such as to cause the liveliest apprehension concerning the financial standing of
the bank, and concerning the safety of the funds entrusted to it, if even only a
portion of such representations were true. And from the particulars furnished
to the Minister by officials of the bank in response to his demand for informa-
tion bearing upon the accounts referred to in the communications sent to him,
it appeared that the indebtedness of the Prudential Trust Company to the bank
on the 15th of November, 1918, had risen to the sum of $933,747.74 (ex. 107,
p. 194). This large increase was due, for the most part, to a further expendi-
ture, the object of which was to protect the original investment, but which in
1918 gave little promise of assisting to work the account out. The account of
A. C. Frost & Co., sometimes referred to as the British Columbia timber account,
was reported on 30th November, 1918, as an indebtedness of $2,425,288.58
(ex. 108, p. 200). The Pellatt & Pellatt accounts showed that $1,900,960.69 of
the bank’s funds were locked up therein (ex. 109, p. 201). A portion of these
capital sums represents interest on the original investment, and the bank’s
statement to the Minister also revealed the disquieting fact that unpaid interest
amounting to $688,962.42 on the Frost account and $234,955.11 on the Pruden-
tial Trust Co. account, had been added to the principal and taken into profits
(ex. 107, p. 195).
It was therefore abundantly clear that the management of the bank had
resulted in an amount over twice its paid-up capital and reserve being locked
up in accounts not realizable, and for the most part not bearing interest, from
which it followed that whatever funds were available from day to day were
those of the depositors, and notwithstanding the declaration of dividends, a
proper accounting would have shown that no profit at all had been made for
years. The bearing of these facts upon the condition of the bank is specifically
enquired of in the next quotation and will, I think, be more properly considered
thereunder.
Answer to question number 1:—
A. In the year 1915 no representations were made to the Depart-
ment of Finance of the Dominion of Canada respecting the condition
of the Home Bank of Canada. Such representations were made in the
year 1916, as well as in the year 1918.
B. The following important representations were made to the
Department of Finance concerning the condition of the Home Bank
during the years 1916 and 1918, viz:—
(1) That an amount more than double the total paid up capital
and reserve of the bank was locked up in four accounts, the securities
for which could not be realized upon.
XXIV SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
(2) That loans wholly disproportionate to the assets of the vank
had been made on inadequate security, from which large loss was likely
to occur.
(3) That amounts representing unpaid interest on at least three
large accounts were carried into profit year by year and dividends
declared on the basis of much fictitious earnings.
(4) That arrangements agreed upon at a meeting of the board of
directors with a view of passing upon all credits and making an early
statement showing the bank’s position, with recommendations, were not
carried out.
(5) That false returns were made by the directors of the bank to
the Department of Finance.
(6) That specific instructions given by the Minister of Finance in
1916 forbidding the capitalizing of unpaid interest, were disobeyed.
(7) That the president and some of the directors were indebted
to the bank in large sums upon personal account and through companies
in which they had an interest.
(8) That the auditor employed by the bank from year to year
was incompetent and important matters were concealed from the board
of directors and from Mr. Lash the bank’s counsel.
Question number 2 reads as follows:—
“Whether, if such representations were made, a state of affairs
was revealed concerning the condition of the said bank such as would
have justified an investigation under the powers conferred upon the
Minister of Finance by section 56A of the Bank Act.”
Argument was presented in support of the proposition that the minister is
responsible to parliament alone, and that unless he were charged with dis-
honesty or bad faith in the performance of his duties, the exercise of his dis-
cretion could not be challenged by this commission. I am not disposed to dis-
pute this contention, seeing that the only duty imposed upon me under this
question is to say whether the representations made to him were such as to
justify him in calling for an audit under section 56A of the Bank Act.
I am not called upon to question the manner in which he made use of
_ the powers therein given to him, nor whether he exercised his discretion cor-
rectly or otherwise. It is easy to conceive that certain representations might
be made to a minister which would be of such a nature as not to call for the
exercise of the rights given to him by this section of the statute, while on the
other hand it is equally obvious that other representations might be made of
a character which would not only justify the exercise of his discretion, but
would make it a matter of careless administration if he should not do so. How
such discretion should be exercised is a matter by itself, and must be for the
determination of the head of the department. If any fault is to be found with
the minister as to how his discretion was: exercised, the complaint must be
tried before parliament itself, always assuming honesty and integrity of purpose
on his part, and no question whatever was, or could be, raised in that regard.
But it is open to me I conceive, to say whether such a state of affairs was
revealed as would call for the exercise of the discretionary powers vested in
the minister. In answer to the preceding inquiry, I have detailed the repre-
sentations which were made, and, taking them as a basis for my answer to this
question, I do not think that any doubt can be entertained that what had been
so represented was of sufficient importance to call for an audit under section
56A of the Bank Act. I am in harmony with the view of Sir Thomas White
as shown in his evidence at page 345 of the record: —
BANKING AND COMMERCE XXV
APPENDIX No. 1
“Q. As a result of the memorandum and other documents filed with
you by Mr. Fisher, you proceeded under section 113 of the Bank Act
to ask for a report?—A. I did. :
Q. You also decided that it would justify an investigation under
section 56A?—A. I asked the auditor to make a report to me.
Q. That is under that section?—A. Yes, 56A, without doubt I
proceeded under the Bank Act.
Q. Well, you might answer my question, you felt yourself justified
in asking for a report under section 56A of the Bank Act?—A. Yes, un-
doubtedly, and calling on the board and on the auditor.
Q. Did you call on the auditor for a report under section 56A of
the Act?—A. Right.”
It will be remembered that in his argument Sir Thomas White contended,
with reference to the evidence above quoted, that in answering these questions
as he did, he was not committing himself to the view that an outside auditor
should have been called in, but that he was confining his testimony to an assent
on his part that the auditor appointed by the shareholders should make report,
and he said that if the questions had been put to him plainly as to his being
justified in calling in an outside auditor, he would have answered them in the
negative, for the reason that, in his opinion, the conditions prevailing in the
bank at that time would have meant that calling in an outside auditor would
have necessitated closing its doors.
The powers given under section 56A of the Bank Act, as it stood in 1916,
were not confined to the employment of an outside auditor, or to the employ-
ment of the regular bank auditor either. The provision was to the effect that
the minister could direct any auditor “to examine and enquire especially into
any of the affairs or business of the bank”, and the argument was, that an
auditor wholly detached from the bank should have been selected, whereas the
minister, in the exercise of his discretion, for the reasons indicated, thought best
to appoint Mr. Jones, the regular auditor of the bank. There is no necessity
for the expression of any opinion upon my part as to whether the minister
should have engaged an inside or an outside auditor for this work; either one-
could be appointed by the minister under that section according to his discre-
tion and the evidence above quoted shows that the minister exercised his dis-
cretion under the section in question by the appointment of Mr. Jones. It
must therefore follow that to his mind the conditions prevailing justified the
investigation under the authority of section 56A of the Bank Act, altogether
apart from the question whether it should be made by one class of auditor or
the other. The enquiry up to this point, has, I think, brought us to the con-
clusion that the reason that an outside auditor was not appointed was that
the minister feared such action would result in the collapse of the bank. It is
not said by anyone that the exercise of the powers given by section 56A were
not or should not, have been called into action. The argument put forward
’ by counsel for the shareholders was, that such discretion as the minister saw
fit to exercise was really useless. The statement that an outside auditor would
have closed the bank, throws some light upon that contention.
The letters which passed between Sir Thomas White and the president
of the bank and Mr. Lash and others, show that it was with considerable re-
luctance that the minister relinquished his first idea of calling the attention
of the Bankers’ Association to the condition of the bank, but that he was moved
thereto by representations of a betterment of condition by change of manage-
ment, and by statements made by Mr. Lash, in whom, it is unnecessary to say,
he reposed a very great deal of confidence; but inasmuch as it is admitted that
these representations resulted in calling upon the auditor of the bank under
XXVi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
section 56A, it is hardly necessary for me to amplify reasons which have led me
to the conclusion that the state of affairs revealed by the representations made,
Justified an investigation under the powers conferred upon the minister by
section 56A of the Bank Act, for what the minister did shows it. That he
considered the situation to be a serious one, is evidenced by his letter to Gen-
eral Mason, then the president of the bank, written under date of January 24th,
1916, (ex. 43, p. 75), immediately after receiving the complaint of the western
directors through Mr. Fisher. It will be remembered that these representa-
tions and complaints were not made by outside people, or by individuals to
whom some personal grievance or antagonism towards the bank could be at-
tributed; they emanated from persons bearing the responsibility of the insti-
tution, being directors, entrusted by their shareholders with seeing that an
honest management prevailed. In this letter the minister said that he con-
sidered it his duty to ask for full particulars, both from the board and from
the auditor, as to the accounts of the Prudential Trust Company, Pellatt and
Pellatt, and A. C. Frost and Co., with a detailed statement of securities held.
In answer to a letter received from the president, asking the minister if he
would have the thirty days referred to in section 113 of the Bank Act to make
such return, the minister advised him that the matter was of so serious a char-
acter that he thought it advisable that the reply should be completed and
forwarded at as early a date as possible.
In writing to Mr. Fisher upon the subject, (ex. 54. p. 86) Sir Thomas further
sald:
“You make certain definite explicit charges, which I conceive it to
be my duty to investigate.”
This latter sentence describes the effect produced upon the minister by the
communications.
The evidence discloses that after the receipt by Sir Thomas White of the
communications from the western directors, attempts were made to change the
management of the bank so as to meet with the approval of all the directors,
and such attempts were well known to the Minister of Finance, being conducted
mainly through the late Mr. Z. A. Lash, K.C., who had personal interviews and
carried on correspondence with the minister concerning the matter. But
notwithstanding the desirability of having the whole directorate in accord, Sir
Thomas White did not consider that to be a solution of the difficulty, and defined
his position in a letter of February 17th, 1916, written to Mr. Lash in these
words: (Ex. 71, p. 162.)
“ Sir Thomas White to Z. A. Lash.
“ Re Home Bank of Canada:
“Dear Mr. Lasu:—I have your private letter of the 14th instant
and think I must ask you for the statements to which you refer. In
themselves they may disclose a situation which apart altogether from the
question of other accounts would cause me to bring the affairs of the
bank to the attention of the Bankers’ Association through its president
here. The position is that I have been made aware by the Winnipeg
directors of a certain condition which is most disturbing. It does not
appear to me that I would be justified in staying enquiry because the
Winnipeg directors may ask me to suspend action. The real question is
whether the bank, having regard to the condition which will be disclosed
by the statements should be allowed to continue business with the public,
I shall be glad, therefore, if you will send me those statements. It would
BANKING AND COMMERCE XXVil
APPENDIX No. 1
not appear to me necessary that you should specially come down about the
matter but I leave this to your discretion. I shall desire, of course, to
give the reorganized board and management every opportunity to restore
the bank’s position, but this statement must be taken subject to the
overriding consideration of the public interest.”
This was the view taken of the matter by the minister both in 1916, and
two years later, when his attention was again drawn to it by Mr. Machaffie’s
letter. The serious character of the representations made therein was appreciated
by the minister, as shown by his letter to Mr. Lash under date of September 4th
1918. He enclosed a copy of the Machaffie letter and asked Mr. Lash to take
the matter up with the board of directors, and expressed himself as follows:—
(ex290} p. 179):
“ Sir Thomas White to Mr. Lash.
“T regard the matter as of the utmost public importance, and it is
my intention to have a thorough investigation made through the Bankers’
Association or otherwise. Before taking this step, however, I wish to have
a reply from Mr. Haney and his board.”
All I am at present directing my attention to is, whether or not the repre-
sentations made would have justified an investigation under section 56A of the
Bank Act. From the testimony above quoted, and from the letters, extracts
from which are set out above, it is very apparent to me that the representations
made were regarded, on all sides, as of a character which would justify such
investigation, and, I thoroughly agree with that view.
Answer to question 2:—
The condition of the bank, as revealed by the representations made,
was such as to justify an investigation under the powers conferred upon
the Minister of Finance by section 56A of the Bank Act.
Question number 3 reads as follows:—
“What action, if any, was taken by the then Minister of Finance, upon
such representations as may have been made.”
It is apparent that the answer to this must be shown by the communications
which passed between the minister and the bank and parties in interest. They
disclose in the first place, a lively apprehension on the part of the minister con-
cerning the position of the bank, and a desire to keep it upon its feet.
Confining myself first to the year 1916, it is evident that the minister acted
promptly on the receipt of the three memoranda from the western directors, for
on the 24th of January, 1916, he addressed a letter to the president of the bank,
detailing the information submitted to him by Mr. Fisher and the complaints
made. After referring to the accounts of the Prudential Trust Co., Pellatt &
Pellatt, and the A. C. Frost Co., the safety and security of which were challenged,
the minister concludes his communication to the president of the bank as
follows (ex. 43 p. 76)—
“Sir Thomas White to James Mason.
“I shall be obliged if you will write me officially, setting out concisely
the history of these loans and indicating the amounts of unpaid interest
(if any) in such accounts. I also request a detailed statement as to the
securities held as collateral and the valuation placed upon them by your
bank. Apart altogether from the question of security, the loans appear
to me to be exceedingly large, having regard to the capital of your bank
XXVill SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
and I can only express the hope that the concern which is undoubtedly
felt by the directors mentioned may prove to be unfounded. In directing
to you this letter with reference to the memorandum which, as I have
stated, has come before me officially, I am following the practice which
we have hitherto adopted in similar cases and am acting under the pro-
visions of section 113 of the Bank Act.”
On the same day the minister addressed a letter to the auditor of the bank,
Sydney H. Jones, enclosing a copy of the letter which he had sent to the presi-
dent, as follows: (ex. 46. p. 78.)—
“Sir Thomas White to Sydney H. Jones.
“The Home Bank of Canada.
“For your information I enclose herewith copy of a letter I have
today addressed to Hon. James Mason, president of the above bank,
referring to a memorandum which has been officially filed with me respect-
ing certain accounts of the bank and requesting detailed information.
Under the provisions of section 56A of the Bank Act, I now direct
and require you as auditor to enquire into the accounts mentioned and
report to me in all proper detail respecting them. Your prompt attention
will greatly oblige.”
Mr. Jones acknowledged the receipt of this letter on the 26th of January
1916, but, further than that, he seems to have paid no attention to the directions
sent him by the minister, who again addressed him on the 24th of the following
month as follows:— (ex. 59. p. 89.)
“Sir Thomas White to Sydney H. Jones.
“Re Home Bank of Canada.
“Referring to my previous letter requesting an investigation by you
of certain accounts of the above bank, I shall be glad if you will send
me as soon as possible a detailed statement showing advances, repayments,
and interest charges on the A. C. Frost Company account. The western
members of the Board have thought it desirable that I should obtain this
information. Your prompt attention will oblige.”
This communication was acknowledged by Mr. Jones on the 26th of Febru-
ary 1916, and on the first day of March following he forwarded a statement show-
ing details of advances, repayments and interest in the A. C. Frost Company
account, which he said that he had duly verified by the books of the bank. (Ex.
61. p. 90.) This is all that was done by the minister or the auditor under the
provisions of section 56A of the Bank Act.
It is apparent that the minister relied with confidence upon the opinions
expressed by Mr. Lash, counsel for the bank, and accepted his conclusions. The
result was, that in consequence of the representations made by Mr. Lash and
the directors, acting then in harmony, Sir Thomas consented to allow them to
work the situation out, but in assenting to this it is plain that the mind of the
minister was hardly at rest and his opinion concerning the condition of affairs
can easily be gathered from his letter to Mr. Lash as follows: (Ex. 84, p. 175).
“ Sir Thomas White to Z. A. Lash
“T have yours of the 23rd inst., in which you set forth substantially
what occurred at our interview on Wednesday. You clearly understand
that I reserve to myself the fullest liberty to consult with the president
of the Canadian Bankers’ Association, or take any other steps which I
mav deem to be in the public interest without further communication
BANKING AND COMMERCE _. XX1x
APPENDIX No. 1
with Mr. Haney or yourself on the subject. In the meantime it appears
to me from the statement of yourself and Mr. Haney and from Mr.
Crerar’s letter that the position of the bank is being improved. I should
like to have from you an assurance that interest upon the Frost account
will not be taken into profits distributed to shareholders in the way of
dividends. It would appear to me also that until the New Orleans situa-
tion is cleared, it would be advisable to pursue a similar course respecting
that account.”
Within a week from the receipt of the letters from Mr. Fisher, the minister had
interviews with Mr. Haney, vice-president of the bank, and Mr. Barnard, then
a director (ex. 51, p. 80), whose dealings with the bank were criticized, and
impressed upon them the necessity of bringing pressure to bear on the doubtful
accounts, and the danger of showing unpaid interest as profit. This was fol-
lowed by communications to the minister from Mr. Fisher, K.C., and Mr. Lash,
K.C., and a communication from J. Cooper Mason, acting general manager of
the bank, to the minister, enclosing papers and documents showing in full the
statements of the accounts which were challenged (ex. 63, p. 93). All these
communications were written and information supplied within four weeks from
the time of the receipt by the minister of the complaint from the western
directors, which shows that no time was lost on his part in an effort to secure
the necessary information. The correspondence shows that the minister was
not convinced that, because the eastern and western directors had settled their
difference, he should stay his hand from a thorough and complete investigation
of the bank’s affairs (ex. 71, p. 162). But further correspondence carried on
by Mr. Lash and Mr. Crerar, and personal interviews with the two latter as well
as with Mr. Haney, and information furnished concerning the accounts—much
of it misleading and false—and promises of a thorough investigation of the
bank’s affairs under the direction of Mr. Haney and Mr. Machaffie, and informa-
tion supplied by both-these gentlemen (ex. 83, p. 172) and the minister’s desire
to prevent the collapse of any bank in view of war conditions, resulted in his
acquiescing in the unanimous request of the whole board that no investigation
should be made. No other report from the auditor was asked for or received.
It was represented to the minister, in a letter signed by Mr. Crerar (ex. 81,
p. 171) that. a change in management had taken place by which he expressed
himself certain that the knowledge and information concerning the position of
affairs desired by the western directors, and the changes they wished when they
sent their request to him, could now be made without calling in outside assist-
ance; that the situation had materially improved within the past month, and
that it was better to have the inquiry proceed from within rather than from
without.
If the information thus furnished to the minister concerning these accounts
had been accurate, I think it is reasonably clear that the course adopted was in
the interest of everybody, including the depositors; but it is difficult to conclude
that they had made a full disclosure to the minister concerning the situation
which Mr. Lash described by letter written on the 29th of February, 1916, to
Mr. Fisher, in these words (ex. 132, p. 292) :—
“7Z. A. Lash to James Fisher
“The more I consider the bank’s position, even assuming that every
account will ultimately be collected in full, the more doubtful I feel as
to the possibility of its continuing in business. The amount locked up
XXX SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
“T told Sir Thomas that my main object, since I learned in outline -
what the bank’s position was, has been to bring about a position, which,
if the worst happened, would result in liquidation with open doors. This
can only be brought about by the assistance of other banks, and I want
definite instructions from the board as to how far I may go in this
direction in consultation with Sir Thomas White, for he is now an essen-
tial element in the situation, which cannot be disregarded. He told me,
and I could not dispute the correctness of his position, that, after you, on
behalf of the Winnipeg directors, had submitted to him information
which, to say the least, was very disturbing, the responsibility was throwu
upon him, which he could not avoid, and which would not be discharged
because those who had invited his intervention might desire him to witb-
hold further action.”
Attention may be drawn here to the fact that this communication was not
addressed to Sir Thomas, nor is there any evidence that he was in possession of
Mr. Lash’s views as above expressed. Foliowing the representations above
referred to, the hand of the minister was stayed, no inspection was ordered, and
the audit, if it can be called such, was useless.
Attention was drawn by Mr. Lafleur, of counsel for the Government, to
the unwisdom of seeking information from the parties whose good faith was
challenged, and he strongly urged that the only proper course to have pursued
would have been to have sought information from an outside source. I am
not asked to comment on the course taken by the minister, but simply to say
what he did. It is open to all concerned to draw whatever inferences the
circumstances would seem to justify in that regard.
Upon receipt of the complaint, in 1916, the first action taken by the minister
was to direct an enquiry into the accounts complained of, and a report thereon by
Mr. Jones, the bank’s auditor, under section 56A of the Bank Act. (ex-46-p-78).
And at the same time he called upon the president of the bank for special
returns under the provisions of section 113 of the Bank Act. (ex-43-p.75).
Turning to the consideration of what was done by the minister in 1918,
when further complaint was made, it is clear that upon the receipt of the
letter from Mr. Machaffie, dated the 29th of August 1918 (ex-88-p-178), the
minister lost no time in communicating its contents to Mr. Lash, as appears
by his letter dater September 4th 1918, in which he enclosed a copy of Mr.
Machaffie’s letter to him, and asked that it be taken up with the board of
directors and a report be made. The letter reads as follows:—(ex-90-p-179).
“ Str Thomas White to Z. A. Lash
“Re Home Bank
“Dear Mr. Lasu,—I enclosed herewith copy of a letter which I have
received from Mr. Machaffie, late assistant to the president of the
above bank. I shall be glad if you will take the matter up with the
board of directors and have a report prepared dealing with the several
charges made. I regard the matter as of the utmost public importance,
and it is my intention to have a thorough investigation made through
the Bankers’ Association or otherwise. Before taking this step, however,
I wish to have a reply from Mr. Haney and his board.”
Absence of Mr. Lash and illness of Mr. Haney seemed to be the cause of a
delay in forwarding the board’s reply to the charges made by Mr. Machaffie,
but it was eventually sent to the minister under date of October 29th, 1918.
(ex-96-p-182). The report is a voluminous one, touching upon all of the doubt-
ful accounts, denying the charges contained in Mr. Machaffie’s letter, and
BANKING AND COMMERCE oS.
APPENDIX No. 1
picturing a condition of affairs with reference to the bank, which, if true,
would have disproved the necessity of action being taken. It is in the form
of a resolution of the board of directors, dealing with all the matters complained
of by Mr. Machaffie, and signed by the president. The regrettable thing about
it is that in very many respects it was not true. But its receipt seems to have
satisfied the minister that the proper course to be taken under the circumstances
was to allow the bank officials to work out the situation. Having said so
much about Mr. Machaffie’s letter, it is right, I think, for me to say, that its
force in anybody’s mind would very naturally be broken by the fact that on
the 25th of February, 1918, Mr. Machaftie had drafted a letter to the
Minister of Finance (ex-135-p-390) in which he made representations con-
cerning the Pellatt account, the New Orleans account, and the Frost account,
commenting adversely upon them, and saying that there were numerous
other accounts in a precarious condition, and sharply criticizing the policy of
the president, Mr. Haney. This letter was not sent to the Minister of Finance,
but a copy of it was forwarded to the Home Bank. (ex-146-p-402). Mr.
Machaffie subsequently retracted all these statements in a letter to the bank,
admitting that his information was inaccurate and incomplete, and that his
first letter would have conveyed a wrong impression as to the condition of the
bank and the conduct of its affairs. Now the minister was acquainted with
the fact of this withdrawal, and that the reason Mr. Machaffie had retracted
these statements was, that he might procure a settlement of his claim against
the bank. If the accuracy of the information concerning the banks’ affairs
had depended upon Mr. Machaffie’s representations, while perhaps it would
be too strong to say that no attention whatever should have been paid to him,
yet the fact remains that he had retracted them under circumstances that
would very materially weaken them, and would also present their author in a
very unfavourable light. If it were a question between Mr. Machaffie and
the officials of the bank, backed in their statement by Mr. Lash, no one would
expect otherwise than that Mr. Machaffie’s statements would be ignored. In
response to the minister’s call for a report upon the matters, there was submitted
to him under date of 29th October, 1918, a lengthy statement signed by the
president of the bank, in the form of a report unanimously adopted by the
board, instructing the president to forward a copy to Mr. Lash, and with a
direction to have the same forwarded to the minister. (ex-96-p-182). The
report made reference to what was done in 1916, and the changes made since
that time in the management of the bank, discussed the accounts which had
given so much trouble, and reported favourably on the British Columbia
account, and the New Orleans account; it denied that any dividends had been
paid out of capital, and asserted that the profits of the bank actually earned had
been sufficient to warrant the payment of the dividends; it set out the net profits
for the years 1917 and 1918, and controverted Mr. Machaffie’s statements
about the shipbuilding enterprise, on which he had commented unfavourably;
it assured the minister that the position of the bank had been steadily growing
stronger, giving figures of its growth comprising the years 1917 and 1918, and at
great length purported to set out the improved position of the institution. It
was a report of such a character as to set at rest the mind of anyone who
believed it, and apparently was written with that end in view. Upon its
receipt the minister apparently was convinced that there was no necessity for
ordering any further investigation. It was so drawn as to raise an issue
between Mr. Machaffie and the president and directors of the bank, thereby
clouding the real question.
XXXil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Answer to question 3:—
The action taken by the Minister of Finance upon the representa-
tions made to him consisted in:—
(a) Calling for special returns from the bank under section 113 of
the Bank Act.
(b) Calling for a report from the bank’s auditor under section 56A.
(c) Seeking and obtaining information from Mr. Lash, the bank’s
counsel, and from its president and other directors, including therein
detailed statements of accounts regarding the dealings of the bank with
the following individuals and firms, viz: A. C. Frost & Co.; Pellatt &
Pellatt; the Prudential Trust, New Orleans account.
(d) Forbidding further capitalzation of interest on doubtful
accounts.
(e) Securing a promise from Mr. Lash and the president that a
thorough investigation would be made of the affairs of the bank under
the direction of Mr. Haney and Mr. Machaffie.
I think it is right to say also that the minister’s intervention in 1916
resulted in a change of management of the bank, Mr. Haney becoming vice-
president, with the understanding that he should discharge the duties of presi-
dent, and have full powers with respect to the organization of the staff; this
change appears to have met with the approval of all concerned, although no
improvement seems to have actually resulted from it. ;
Question number 4 reads as follows:—
‘““What effect would an audit under section 56A of the Bank Act,
if made in 1915, 1916 and 1918, have had upon the conduct of the affairs
of the said bank and upon the position of the present depositors.”
Confining myself to the years 1916 and 1918, as no evidence whatever has
been directed towards the year 1915, it is clear that an effective audit would
have revealed a condition of affairs demanding the application of immediate
and drastic remedies. It will be noticed that both in his evidence and in his
argument Sir Thomas White directs attention to the fact that he called for an
audit of certain accounts under the above mentioned section of the Act, and
the criticism of the other counsel was, as outlined in the answer to question Pa.
that he directed the auditor of the Home Bank to do the work, instead of select-
ing an outside auditor or one named by the Bankers’ Association, as he had
first in mind. It is apparent that he received no such audit, and at page 346
of the evidence he thus describes it, in answer to questians put by Mr.
McLaughlin:—
“Q. So while you directed the audit under section 564 you never
received one?—A. I received an audit of the Frost account.
“Q. Just the statement from the ledger?—A. Well, that is what
appears in these exhibits. It is not in my mind that I received anything
else, but I may have. But I do not say I did.
‘““Q. There is nothing else in the exhibits. That of course was not
the kind of independent audit that these directors wanted?—A. Not up
to a certain stage, up to a certain stage they wanted an independent
audit.
“Q. And this was the auditor who had certified to the various
reports of the bank from year to year?—A. Yes.
BANKING AND COMMERCE XXXII
APPENDIX No. 1
“@Q. So to ask him for a further statement would be to merely ask
him to send in his previous report or else show he was wrong?—A. I do
not think so, the previous report dealt with general accounts. I asked
him for a report in all fitting detail.
“Q. Anyway, the report was never received, except this?—A.
Apparently not.”
The evidence of the minister is to the effect that had he known the true con-
dition of affairs in 1916 or 1918 he would have taken steps to meet the situation.
The steps indicated by him were, that by calling in the aid of the Bankers’
Association, arrangements could have been made to have the bank taken over
by another institution. Even if, for reasons that might be imagined, this could
not have been consummated, I think a revelation to the stockholders of the
existing condition of affairs could have had no other result than a complete
change of management. Anyone whose funds were at stake must instantly
have realized the necessity of forcing the liquidation of the large accounts,
whose inactivity was gradually drying up the resources of the bank. It is
impossible to state with certainty what would have occurred in any line of
business, had certain events intervened, and what renders an estimate in that
regard most questionable, is the fact that one’s mind and opinions are liable
to be influenced and shaped, even unconsciously, by events subsequent to the
period which is under consideration; consequently the value of an answer to
a question of this nature must for that reason be impaired; but notwithstanding
all this, one can always rely in judgment upon the continued operation of natural
impulses for safety which prevail in financial dealing. It is a fact that dis-
closure of the true financial condition of the bank in 1916 and still more in
1918, would have shown that, under the management of the then board of
directors, the bank had been placed in most extreme Jeopardy; that they, and
others associated closely with them in its affairs, had access to the resources
of the institution to a degree wholly incompatible with the bank’s financial
standing; that the capital had been most seriously impaired, if not altogether
lost, and fictitious earnings were being put into profit and loss account as a
justification for declaring dividends which had not been earned, and in view of
these facts I think it can safely be said that the effect of an audit of the bank’s
affairs in 1916 or in the year 1918, would have been to bring to the attention
of the shareholders a condition of affairs which would have moved them instantly
to insist upon a change of management, and to have wholly reversed the policy
theretofore pursued. It is inconceivable, I think, that the permission of the
Department of Finance, or of the shareholders of the bank, could have been
procured to countenance the continuation of the then conduct of the bank’s
affairs, as must have been disclosed by a thorough and effective audit. It might
have come to pass that the minister, after such audit, would have been able to
secure the amalgamation of the Home Bank with another bank. If that desir-
able course could not have been effected, the bank would have come under honest
management, and in my view, been compelled to liquidate its affairs; for after
disclosure of its true condition, as must have followed an effective audit, there
would inevitably have been an instant demand by the depositors for their money,
and a withdrawal of public support generally, which, in view of the condition of
the large accounts, and the impossibility of converting them into liquid assets.
must, I think, have resulted in liquidation.
I now turn to the second branch of this question, which asks:—
“What effect such audit would have had upon the position of the
present depositors.”
1—3
XXXIV SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
In answer to this I may say I am taking it for granted that such audit would
have been thorough and effective, and as observed above, I think the result
would have been either to close the bank altogether, or put it upon a firm founda-
tion as an integral part of another banking institution, since, for the reasons above
noted, I do not think it could have had further independent existence. In the
light of this supposition, it is obvious that as far as the year 1916 is concerned,
such audit would have saved the situation for the then depositors, for although
the capital and reserve had largely, if not wholly, disappeared, yet despite the
loss thus made, there was still left a fairly balanced account, according to the
testimony given by Mr. Edwards.
There is no evidence as to what number of those who are referred to in the
question as “ present depositors,” occupied that position in 1916 and 1918; but
T think it is clear, as regards those who were depositors in the first named year,
that if either of the aforegoing remedies had been applied, their accounts would
have been met in full from the then resources of the bank, backed by the
double liability of the shareholders, and it is this last asset which might have
saved the situation for the depositors in the year 1918.
It is my duty to specifically inquire into the financial condition of the
bank during the years 1916 and 1918 under the next succeeding question, and
the result of that inquiry is closely bound up in the answer to the present one;
but my finding on this branch of question 4 is that an effective audit in 1916
would have resulted in action which would have saved the depositors from
loss. While, because of lack of evidence on which to base a conclusion, it is
impossible to speak with as much certainty as regards the year 1918, the prob-
ability is that the same result would have followed had the audit been made and
action taken in that year.
Answer to question 4:—
For the reasons above set out, I think an effective audit under sec-
tion 56A of the Bank Act made in 1916 or 1918, would have resulted, as
far as concerns the conduct of the bank’s affairs, in either:—
(a) Liquidation immediately following such audit, or,
(6) Amalgamation with another bank.
And the effect of such audit upon the position of the present
depositors :—
If made in 1916 the present depositors would have suffered no loss.
If made in 1918, I do not think any loss would have fallen upon
them.
Question number 5 reads as follows:—
“What was the financial condition of the said Home Bank of Canada
in the years 1915, 1916 and 1918 respectively, and what steps, if any,
could have been taken by the Government to save the situation?”
The returns to the Government for 1916 show (ex. 170, p. 495) that the
paid-up capital of the bank was $1,946,639: the reserve, $300,000; the deposits,
$10,028,224: the total liabilities were $18,722,963; and the total assets
$21,030 253, Upon this showing a dividend of five per cent was declared and
paid. The foregoing figures indicate an excess of assets over liabilities of
$2,307,390, which represents what the officials of the bank reported to the
Government in that year as to the financial condition of the Home Bank of
Canada. The expert accountants, Mr. Clarkson and Mr. Edwards, who testified
before the commission, were undoubtedly best equipped to find the answer to
this question. Whatever lack of unanimity there is in the opinions expressed
BANKING AND COMMERCE XXXV
APPENDIX No. 1
by these two gentlemen, arises from a difference as to what would have been
their respective opinions if confronted by the physical assets of the bank in
1916 and asked at that time to pronounce upon their value. If the answer to
the question—what was the financial condition of the Home Bank in 1916—
depended wholly upon ascertaining what value should be placed upon the bank’s
assets in the year indicated, I think that is a most difficult thing to determine.
Confining attention for a moment to the large accounts which were challenged,
it seems to me that the one concerning which an auditor at that time would
have spoken with most certainty, was the Prudential Trust account, spoken of
as the New Orleans account. The bonds, which were security for the loan, had
become worthless by the underlying property having been disposed of under a
prior claim, and it looked as if a total loss would be made in that particular,
and yet, to illustrate the difficulty of relying upon opinions thus formed, it is
only necessary to say that at present, Mr. Clarkson holds out strong hope of
this account being paid in full, that result having followed from further expendi-
ture for the purpose of protecting the claim. An estimate of the value of the
security underlying the loan to A. C. Frost & Co. in 1916 must have been influ-
enced by the reports on these timber limits, then on file in the offices of the bank,
as well as from reports of two of the directors who had personally visited the -
locality and pronounced favourably upon it. A like remark may be made as
to the Pellatt & Pellatt loan, and while both these latter have turned out much
more disastrously than could have been anticipated, they nevertheless, in the
year 1916, could not have given to an auditor anything like the concern which
now prevails regarding them. Again, the wisdom of adding interest to an
existing loan and carrying such interest into profits year by year, as far
as the safety of the investment is concerned, must depend upon the value
of the underlying security, and that remark I think has a bearing upon
what conclusion an auditor in the year 1916 would have drawn as to
the financial condition of the bank from the standpoint of its physical
assets represented so largely by the existing securities for these large
loans. I can draw only lame conclusions in view of the reports which
would be laid before the auditor in 1916. Clearly an auditor could not have
taken it upon himself to have personally valued the timber lands, nor indeed
to have gone over all the properties and securities represented by the Pellatt
loans or the New Orleans Railway loan, but looking at such information as was
available for him in the year 1916 with reference to the securities underlying
these large loans, and speaking from the standpoint of that year, it is difficult
to say what value should have been placed upon these assets in 1916, and
consequently what its financial condition was viewed from that standpoint.
If estimated in the light of knowledge since acquired, the answer is easy. But
I think there were easier tests to apply, which were open to his observation,
and would have challenged the attention of any competent auditor. One of
these lies in the power of the bank to earn and pay dividends from year to
year. While from the standpoint of abstract security as manifested by the
reports available, I think it could hardly be said at that time, that the capital-
ization of interest on these accounts would necessarily be productive of danger,
yet considering that such course resulted in depriving the bank of its liquid
assets available for dividends as well as for daily use, I think these accounts
were calculated to cause the liveliest apprehension. It is just as necessary
that a bank be in a position to marshal its assets for the purpose of a dividend
as that its solvency be manifest from a comparison of its general liabilities and
assets, and having regard to the capital and resources of this bank, the capitali-
zation of interest on these large accounts from year to year must have been
Jooked upon as a most dangerous and alarming procedure. And I think it
would be equally correct to say that the existence of these accounts them-
1—33
XXXVi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
selves, which rendered it necessary to capitalize the interest, was a most
disturbing circumstance apart from the question of securities held for them.
The effect of a bank passing a dividend is too well known to require comment.
Conditions may be imagined in which directors would wisely determine it to
be better to pay the ordinary dividend, even though the profits were unliquid,
as in the case of this bank; but, before another year should elapse, unquestion-
ably steps should be taken to force the liquidation of accounts rendering that
course necessary, otherwise the result would be as in the present instance.
Also, there is always an existing danger that for some reason or other a
run upon a bank’s funds may take place for which a volume of ready money is
necessary to tide over the situation. Whether any cause exists justifying such
action is beside the point. It does occur from time to time that depositors
become alarmed, frequently for no valid reason, and in consequence of such
alarm demand their money. No bank should lose sight of the possibility of
such an incident taking place, and be prepared to meet it. From that point
of view it is unnecessary to argue that these accounts then carried by the Home
Bank were altogether incompatible with safety, and I think that any competent
auditor would have felt compelled to so report. Here again it will be per-
ceived that this has no direct bearing upon the sufficiency of the security for
the principal and interest of the loan, but the existence of these large loans
was, in my opinion, wholly contrary to sound banking principles, for the two
reasons briefly outlined above, and therefore that they created a very dangerous
condition for the bank. Now for these reasons, rather than from the
comparison of assets and liabilities, I think a competent auditor, viewing the
situation in 1916, would have felt compelled to report an extremely dangerous
situation in connection with the bank, for it was apparent that dividends were
being paid out of interest which had been capitalized; in other words, from
earnings which were not available, and he would have been confronted by the
ominous fact that the amount of interest so capitalized and taken into profits
then amounted to much more than the whole capital and reserve of the bank.
He would have seen that during the year 1915, although a profit of $163,900
was shown, the actual state of affairs was that there had been taken into
profits uncollected interest on four accounts to an amount exceeding $275,900;
(p. 270) that in the year 1916, in which a profit of $133,406 was shown, un-
collected interest to the amount of $210,000 (p. 271) had been put to profit
account. Now the necessity of taking these uncollected annual amounts into
profit and loss in order to declare a dividend, would have given to an auditor
most serious concern, apart altogether from the question whether the security
available for each individual account could have stood the strain of the addi-
tional interest as well as the principal which it professed to guarantee. No
doubt an auditor would have been very much embarrassed by finding these
large accounts in the condition in which they were, and must have reported
them with such comments as in his judgment were necessary bearing upon
the question of security, but apart from their safety from that standpoint, the
fact that by capitalizing the interest of these accounts they were absorbing
more money than the bank was making year by year, would convince him that
a very grave situation existed. I have illustrated the situation with refer-
ence to 1916 by a reference to the accounts above named, but other accounts
were in a similar condition, and the combined effect of all these matters were
danger signals of the most alarming nature.
For the reasons suggested above, I cannot satisfactorily work out an answer
to this question from a comparison of assets and liabilities. I think it must
have been as a result of looking at the matter in this light, on the part of the
late Mr. Z. A. Lash. K.C.. that as early as February, 1916, he wrote to Mr.
BANKING AND COMMERCE Xxxvii
APPENDIX No. 1
Fisher, K.C., of Winnipeg (ex. 132, p. 292) the letter previously set out, in part,
in my answer to question three, wherein he expressed doubt as to the possibility
of the bank continuing in business, because, as he therein said: —
“ZA. Lash to James Fisher.
“The amount locked up indefinitely in four large accounts, is prob-
ably three times the paid-up capital and more than half the total deposits.”
And he also alluded to the danger of even a slight run upon the bank.
Having regard to the condition of the bank in the years in question, from a
comparison of the assets and liabilities, Mr. Edwards has testified as a result of
his investigations that the assets of the bank in the year 1916 should have been
reduced by the sum of three millions of dollars thereby leaving the liabilities and
assets about even, thus assuring the depositors of the safety of their money, and
that the entire capital and rest had disappeared (p. 515). In arriving at these
figures Mr. Edwards put a valuation upon the assets, as it would be necessary
for him to do, and while that is easily done at present, yet from the standpoint
of the information available in 1916, I cannot say that it would have appeared
so clearly to me at that time.
Mr. Clarkson, one of the liquidators, spoke very guardedly as to the exact
position of the bank in 1916, but remarked (p. 283) :—
“He must have felt that the bank was not earning profits sufficient
to continue payment of dividends without capitalizing interest on accounts
which were in jeopardy or at least in deep water; and that being the case,
the situation must have appealed to him as a serious situation.”
And further says (p. 287) :—
“There were a great many danger signs and the revenue situation
was one of them.”
Down to May, 1916, the interest capitalized on the A. C. Frost & Co. account
was estimated by Mr. Edwards at $535,000 (p. 540), and it may not be out
of place to say that until the date of failure interest had been capitalized to the
extent of over two millions of dollars.
The financial condition of the bank in the year 1918 when the attention
of the minister was drawn to it a second time, had become more serious, although
returns to the government for that year gave no cause for apprehension. The
returns showed (ex. 170, p. 495) paid-up capital to have slightly increased, it
then being $1,947,635. Reserve stood at the same figure, viz., $300,000. The
deposits showed almost five million dollars increase, being $14,988,422. The
total liabilities were $25,842,635, and the assets $28,270,766. From all of which
it appeared, that if the assets were realizable, the bank was, from that stand-
point, on safe footing. But an examination of the books would have shown—
according to Mr. Edwards’ testimony—that the accumulated and unpaid interest
for the years 1916, 1917 and 1918 amounted to $676,000 (p. 509), which illus-
trates in a startling way how dangerous these frozen accounts were. Such
examination would also have shown that in 1917 a profit of $142,900 was shown
in the bank’s statement, but that in that year interest to the extent of $205,000
was capitalized and never collected (p. 271); that the earnings of the bank for
1918 were $167,157 which was the most satisfactory showing for a long while,
but as a matter of fact the annual statement represented the bank to have made
$228,963 in that year (p. 271).
XXXVili SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
After the receipt of Mr. Machaffie’s letter the minister reverted to his deter-
mination to refer the matter to the Canadian Bankers’ Association, but for the
reasons which have been duly detailed in answer to question 3, he was persuaded
not to do so.
As to what further loss in capital had taken place between 1916 and 1918,
it is difficult to form a conclusion. That some such impairment had taken place
within that period is certain, although no details of amount are furnished in
the evidence. Two yearly dividends amounting to over $190,000 had in the
meantime been paid.
The concluding part of this question asks:—
“What steps, if any, could have been taken by the Government to
save the situation.”
In considering what the Government might have been able to do to that
end in the years above mentioned, attention is directed to the probability of
assistance from other financial institutions. By its continual supervision of
banking matters and from the fact that there must be a renewal of the charter of
each bank every ten years, it is obvious that the Department of Finance is in a
position to exercise much influence with the Bankers’ Association. While the
Government has no power to compel one bank to take over another, and the
Bankers’ Association has no funds with which to assist a weak bank, never-
theless, the stability of banking institutions being supreme law in financial
circles, one can see the force of the opinion expressed by Sir Thomas White, that
intervention on his part would have resulted in the Home Bank being taken over
by another bank or by other banks. Speaking strictly, such action could not be
forced upon the Bankers’ Association, or upon any bank, and therefore, if one
is to consider what the Government could have done to save the Home Bank,
apart from co-operation by the Bankers’ Association or by other banks, the answer
to such restricted enquiry is, I think, that the Government, after ascertaining
the facts, could have closed the bank and forced liquidation at a time when, in
my opinion, no loss would have fallen upon the depositors. But there still
remained, however, the good services of other financial institutions responding
to the express desire of the Department of Finance, especially when considering
the imperative necessity for financial stability at that time. Whether, in view
of the situation which would have been then disclosed by a proper audit and
inspection, any other financial institution would have burdened itself with the
Home Bank’s liabilities or not, is a matter to which J cannot give absolute and
definite answer. The evidence of Sir Thomas White is clear and distinct that
he would not have allowed the Home Bank to fail at that time, but he would
have had it taken over by some other institution, clearly explaining, however,
that such action could not be made imperative upon any other bank. He was
referring to the condition of affairs from a national standpoint, and to the
overwhelming necessity at that time for keeping up a strong financial front in
face of the world’s demands, and replying upon the unquestioned patriotism of
those who directed the issues of financial matters within Canada. Sir Henry
Drayton expressed the same opinion. Keeping in mind these two spheres of
operation open to the Government, it is clear I think, that all that it could have
done to save the situation for the depositors would have been either to have
closed the bank, forcing a liquidation of its assets to meet its liabilities as far
as then possible, or have brought such influence to bear upon the Bankers’
Association, or some other bank, as might have resulted in its amalgamation with
another financial institution.
BANKING AND COMMERCE kK
APPENDIX No. 1
Answer to question 5:—
I. The financial condition of the Home Bank was:—
In 1916:
(a) More than double its total paid up capital and reserve was locked
up in four accounts, the securities for which were not realizable.
(6) No interest was being paid on three of these large accounts.
(c) No money was available for dividends except money belonging
to the depositors, and the dividends paid from year to year were paid out of
the depositors’ money.
(d) A demand by the depositors for even a small percentage of their
money could not have been met.
(e) The total paid up capital and reserve of the bank had been lost.
(f) A loss of assets calculated by Mr. George Edwards at over
$3,000,000, had been sustained, leaving the assets and liabilities about even.
In 1918
(a) There had been no reduction in the amounts due to the bank
from their heaviest debtors, but on the contrary further capitalization of
interest had taken place.
(6) All the weaknesses which existed in 1916 were accentuated.
(c) The dividends paid in the meantime, amounting to over $190,000,
had been paid out of money belonging to depositors.
(d) A further loss of assets had been sustained but the auditors were
unable to state with any certainty as to the amount of such loss.
II. The only steps that the Government could have taken to save
the situation would have been to make thorough investigation into the
bank’s affairs, which would have resulted:
(1) In forcing the liquidation of the bank, or,
(2) Bringing about its amalgamation with another bank.
It will be noticed that by Order in Council number 412, dated 17th March,
1924, the Committee of the Privy Council advised that the powers of the Com-
missioner under Order in Council number 306:—
“ Be not limited to the specific years 1915, 1916 and 1918 referred to
in the petition of the depositors, but should extend to an investigation of
the affairs of the said bank during the whole interval between the issue
of the bank’s charter and the failure of the said bank, including any
representations made to the Government of the day, as to its condition,
any action taken by way of the Ministers of Finance upon such repre-
sentations as may have been made, and the effect on the position of the
depositors of any audit under section 56a of the Bank Act if made at
any time in consequence of such representations.”
I beg to report that there is no evidence that representations of any kind
were made to the Government concerning the Home Bank of Canada subse-
quent to the year 1918.
x] SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
After his retirement from office, correspondence took place between Sir
Thomas White and his successor, Sir Henry Drayton, bearing upon the condition
of the Home Bank, as set out in the evidence given before me by Sir Henry
Drayton, but nothing requiring consideration here arises therefrom, as in any
way bearing upon the substance of the depositors’ petition.
An incidental reference to the Home Bank was made by Sir Henry Drayton
to his successor in office, the Right Honourable W. 8S. Fielding, when the latter
succeeded to the position of Finance Minister, but nothing was said as to the
existence of the memoranda or letters above referred to.
No representations of any kind appear to have been made to either Sir
Henry Drayton or to the Right Honourable W. S. Fielding concerning the
condition of the Home Bank, and although the present Minister of Finance
expressed himself as ready to give evidence before the commission, if required,
it did not seem to me that anything had taken place which made such a step
necessary. There was nothing to indicate that his attention had ever been
drawn to the existence of the various memoranda or to the correspondence above
dealt with.
Having reference therefore to the scope of the enquiry, as enlarged by Order
in Council number 412, I beg to report that there were no representations of any
kind made to the Government of the day as to the financial condition of the
Home Bank of Canada after the year 1918, and consequently no action in that
respect was taken by any of the Ministers of Finance.
All of which is respectfully submitted.
Orrawa, the 10th day of June, 1924.
HARRISON A. McKEOWN,
Commissioner
14-15. GEORGE V APPENDIX No. 1 A. 1924
REPORT ON AGRICULTURAL CREDIT
By Mi ORY,
Ottawa, April 4, 1924
The Honourable James A. Ropes,
Acting Minister of Finance,
Ottawa, Ont.
Sir,—I have the honour of presenting, herewith, the report on Agricultural
Credit, which I was asked to prepare by the Right Honourable W. S. Fielding
for the Department of Finance.
Your obedient servant,
Hr.” DOr.
President of the University of Alberta.
Administrative Chairman of the Honorary
Advisory Council for Scientific and Industrial
Research.
xii
14-15 GEORGE V APPENDIX No. 14 (A.© 1924
TABLE OF CONTENTS
PAGE
Mn trOCMCHION kc leiclee cc accice Seg eee ee eee | SIM
@eneral,@onsiderations:. <. J. Goes eee
Rural Credit in Europe—
Gi): Sone. erm: on Mortgace (Credit. 6 A pote es oa el
(2) Short) Term’ or Personal (Credit: gacaagi fick, Som tee io oe ae Ine
Rural Credit in the British Empire Outside of Canada—
(Cl)? Lhe United Kunedom si 2 Cae Sea, Ge eS, Se ee lan
(2)) The ‘Commonwealth ofAustralta= <0. eo) ee ee a alpine
(3) Dhe Union. of Souths Atm caine. .4 eames. oo kanes eae ve, oe ee oa
(4) 4the Dominion ofiNew Zealande nice. ois. Fe Eo ee
Rural Credit in the United States—
@) one erm) or Monrtouge Credits. 26 26 es ee ion
(Qe Pederal Wand sBanks?. faies. 6.038. ol ee ee el eet
(Oo) ANationalHarntodnt ‘Associations? so a ee Ce ee) ley
Cos Joint Stock! Banks: 1k Se. Le ee Bee ee ee ee erry
@) Short:Berm and Intermediate Credit’: .5 3.95. 93 75 8 ee
(@): Federalintermediate: Crediy Banks. 82 50.6 oe er
(6) Nations] Apsicultural Credit @orporations.{ .2 .. 2. ..8. 5... xe
Rural Credit in the Dominion of Canada-—
Gh) irish Columbia 2 see 8 coe pays eee ee SR ee en ean
(Bye Quebec... sticky dees comes oon leece tales ues key Ae ees Oa rea
(3) Nova Scotia: sis Ree ee ea ee ee ee ee ee een
(4) New Brunswick vey. 8 Satie ey ei ene eae ee
(5) F Ontario. os as ee eee eee cane eee SR as aa ea a ale cae ai
(G6) “Mimitoba. cy 3 (eee ee es ey Ree ae ee
(7) Saskatchewan sc sevee es sone cul ee ee ne ee ee
(S) VAlberta. 8s en ee ee ce Ot eee ra
CXil
exvi
eXvili
Consideration of Methods in Relation to Canadian Conditions.. .. .. CXxxi
xiii
14-15 GEORGE V APPENDIX No. 1 A. 1924
INTRODUCTION
On the authority of a letter from the Minister of Finance, dated August 23,
1923, I undertook to make an enquiry into the subject of Rural Credits. The
above mentioned letter intimated that the enquiry should be along the lines
suggested in the Report of the Special Committee appointed to enquire into
Agricultural Conditions, dated January 19, 1923. The report is as follows:—
“As to the necessity of credit on more advantageous terms to the
farmers of this country, there can be little room for difference of opinion.
Well selected and secured farm loans should be among the safest and
most attractive of investments, while the security offered through the
pledging of non-perishable and readily marketable farm products is
certainly comparable to that offered by merchants and manufacturers.
Notwithstanding these facts, the agriculturist of Canada, in certain parts
at least, pays considerably more for long term credits secured by his
property than many of his competitors in other lands as well as more
than is paid by many of his fellow citizens in other walks of life for
similar accommodation,
“Your committee are of the opinion that after consideration along
the lines hereinafter respectfully suggested, the Government should
promote the obtaining by agriculturists of this country of long term
credits, as well as intermediate credits, and that action should be taken,
and, if necessary, legislation enacted to this end at the earliest possible
date.
“The attention ef your committee has been forcibly brought to
the fact that the operations of the Federal Farm Loan Board system in the
United States offer, through the National Farm Loan Association, the
Federal Land Banks and the Joint Stock Land Banks, facilities for long
term credits to the farmers of that country which when prudently
availed of, are of immense advantage to them. Likewise, it would appear
that the farmers of certain European countries, as well as of other parts of
the commonwealth of British nations, enjoy credit facilities of an advan-
tageous nature.
“The Federal Farm Loan Board system, operating through the
Federal Intermediate Credit Banks and the Agricultural Credit Corpora-
tions in the United States, is designed to supply to a very large extent, to
agriculturists, intermediate credits, that is to say, credits running from
nine months to three years.
“Tt will be remembered that there are at present operating in Canada
certain provincial systems. As to the success of some of these, serious
differences of opinions have been expressed. It would appear that some
are suffering from inadequate loaning funds.
“To what extent the Federal Government should inaugurate a federal
system of long term and intermediate term loans to farmers; how such
system, if inaugurated should be related to the different provincial systems;
what features of, or other systems of, farm credits could, with advantage,
be adopted, are all matters requiring further searching investigation.
“Your committee have heard a number of witnesses and have devoted
a considerable amount of study to the question. They feel, however, that
the system is of such paramount importance that further investigation
and study should take place before definite legislation is brought down.
xiii
xliv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
All authorities apparently agree that there is a barren area of credit
unsupplied by either the banks on the one hand or the loan companies
on the other.
“We, therefore, recommend the investigation by the Government
into the question of long term and intermediate term rural credits; the
operation of existing schemes in Canada, the United States and else-
where; the examination of the question as to whether and to what ex-
tent systems of agricultural credits should be fitted into and related to
our present banking system; as well as the operations of mortgage and
loan companies; and that to this end, and in such manner as may appear
best to the Government, the views of agriculturists, bankers, representa-
tives of loan companies, officers of the present Canadian provincial loan
system, as well as of the officers of the Federal Farm Loan Systems in the
United States, should be obtained, in order that adequate and well-
founded action for the relief of the present situation may be taken.
“Tn this connection also, the attention of your committee was drawn
to the question as to whether it would be advisable and in accordance
with sound economic and banking principles to extend to those provinces
which desired to obtain money for their rural credit systems, facilities
for obtaining of credit such as are afforded to the chartered banks under
the provisions of the Finance Act of 1914, under the provisions of which
Dominion notes are issued to the banks against the deposit of certain
approved securities with the Treasury Board.”
Taking, therefore, the report of the Special Committee as a basis for the
enquiry, the procedure in obtaining information was as follows:—
First, all the documents, legal enactments and reports of the Dominion
Government and the Provincial Governments, not already in my possession,
were obtained and studied. Following this the central provinces, Alberta, Sas-
katchewan, Manitoba and Ontario were visited, and the schemes in actual opera-
tion were gone into with the officials responsible for their administration.
Wherever possible ministers of Provincial Governments were consulted, especially
those having already had experience in the creation or the working of legislative
enactments. The province of British Columbia and the Maritime Provinces
have not yet been visited as time did not permit, but the laws in operation and
the reports of the provinces have been studied.
In order to get first-hand information of the condition of affairs in the
United States of America, some time was spent in the offices of the Farm Loan
Board in Washington, under whose supervision both the Federal Land Banks and
the Intermediate Credit Banks are functioning. Through the offices of this
Board the fullest information was made available to me both by means of docu-
mentary evidence and personal interviews with those responsible for the ad-
ministration of the affairs of these great organizations.
Further, letters of introduction were given me to the presidents of the Federal
Land Banks in all the centres of the country where they now operate. I was able
by visiting some of these centres to get information on the actual working of
their plans in the most intimate way.
In selecting points for detailed study, banks operating in parts of the coun-
try bordering on Canada, the problems of which would be similar to, our own,
were selected. These were the Land Bank of Springfield, Mass., which operates
in the states of Maine, New Hampshire, Vermont, Massachusetts and northern
New York and the Bank at St. Paul, the operation of which covers northern
Michigan, Wisconsin, Minnesota, North Dakota and Montana. The Bank at
Baltimore was also visited and studied intimately as presenting somewhat
contrasting conditions to the others.
BANKING AND COMMERCE xlv
APPENDIX No. 1
At this point I wish to express my grateful appreciation for the generous
treatment accorded me by all the officials of the organizations in the United
States and especially to Commissioner Cooper of the Farm Loan Board at
Washington, through whose kindness the doors of the organizations all over
the country were opened to me.
A good deal of documentary evidence was collected first hand at the centres
visited. Many of the foreign documents were made available through the
kindness of Mr. Doherty, of the International Institute of Agriculture, Ottawa,
while valuable assistance in the same way was given by Mr. Lynch, of the
Department of the Interior.
The problems involved in the enquiry were also discussed with bank
managers in the United States and Canada, as well as with managers of loan
companies and insurance companies in both Eastern and Western Canada.
In addition to the information thus obtained, I drew upon the evidence
which I collected when in Europe in 1913 with the American Commission, and
the reports which grew out of the work of the commission. As far as possible,
documents have been obtained showing the recent trend of rural credit organi-
zation in Europe and in Great Britain. Documents have also been obtained
from New Zealand, Australia, South Africa and South American countries
where systems of rural credits are already in existence. So far as the time at
my disposal would permit, I have tried to cover the field of the practical appli-
cation of rural credit principles, as distinguished from mere theorizing about
the matter.
One further word by way of explanation. The usual method of holding
public sessions of enquiry has not been followed. The facts collected were
from responsible people whose statements were substantiated by documents,
legislative enactments and official reports. Many expressions of opinion were
received by letter and from individuals personally. These opinions, however
extreme, have been duly considered and carefully weighed.
In what follows a precise presentation of the facts gathered is attempted.
Technical terms and statistical information have been avoided, unless con-
sidered absolutely necessary for a proper understanding of the issues involved.
In the interest of clearness the report is divided into six sections as follows:—
Section I—General Considerations.
Section IJ—Rural Credit in Europe.
Section I1I—Rural Credit in the British Empire, outside Canada—
(a) Great Britain.
(b) Australia.
(c) South Africa.
(d) New Zealand.
Section [V—Rural Credit in the United States.
Section V—Rural Credit in Canada.
Section VI—Consideration of Methods in Relation to Canadian Condi-
tions.
I have tried to make every section of the report complete in itself, so that,
after reading section 1, those interested in the study of the special problems of
the individual country may do so without reference to other parts.
It is hardly necessary to point out the movement for Rural Credits on
this continent is not an incident in the history of an individual country, but
is part of a movement covering the whole civilized world, and would appear
to be a normal development growing out of the conditions of modern agricul-
ture.
xlvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
SECTION I
GENERAL CONSIDERATIONS
The terms Rural Credit, Short Term Credit, Long Term Credit, and Inter-
mediate Credit, require definition as they are used ambiguously in much of the
current literature in which the terms occur.
The term “Rural Credit” is used in both Europe and America in a general
sense to include all forms of credit which have to do with the production and
distribution of farm crops. It will be used always with that meaning in this
report.
The term “Short Term Credit” has a different meaning in Europe from that
which it has in the United States. In Europe it means all forms of credit in
relation to agriculture other than mortgage credit and in which the security
is personal or easily negotiable collateral. In the United States the term is used
generally in reference to ordinary banking transactions of from three to six
months. In Canada it is used in the same sense, except in legal documents refer-
ring to Rural Credits where its meaning is the European one. When discussing
European methods, therefore, it will be necessary to use the word with the
European meaning as comprehensive of the two American terms. “Short Term
Credit” and “Intermediate Credit.” In discussing Canadian documents it will
be necessary, in order to avoid confusion, to define the term when used.
The term “Long Term Credit” is everywhere used to mean mortgage credit
and in relation to agriculture, farm mortgage credit for terms of five years or over.
The only exception is in France where a special meaning is given by the use of
the terms “Long Term Collective Credit” and “Long Term Personal Credit.”
The context, however, will be found to give sufficient explanation in these
cases.
The term “Intermediate Credit” is always used to mean credit for a period
longer than the ordinary banking transaction of from three to six months, and
yet shorter than the ordinary mortgage term. The period may vary from six
months to five years. The security is non-perishable farm commodities or stock
security but is not based on land mortgage. As worked out in the United
States where the term is now official, it is a banking operation but done through
a bank specially regulated to cover the longer term stated above. In this sense
only will the word be used.
The problem which the Rural Credit organizations seek to solve is how to
safeguard and promote the economic interest of those engaged in agricultural
pursuits, especially by providing them with such facilities for obtaining credit
that they may be able to acquire the means of production and to dispose of
their produce on such favourable terms as to make farming a profitable enter-
prise.
One great reason why all countries have found it necessary to solve in
some measure this problem is that agriculture is everywhere regarded as the
fundamental industry, which if not prosperous reflects its lack of prosperity on
every other national activity. This is especially true of all those countries
which seek to become even approximately self-supporting.
In order to make possible the instruments of production to those whose only
capital is the land the Long Term or Mortgage Credit systems arose. To make
possible the seasonal operations by means of which production and disposal
could be profitably undertaken the Short Term and Intermediate Credit systems
came into being.
BANKING AND COMMERCE xlvii
APPENDIX No. 1
The aims of the Long Term or Mortgage Credit systems, so far as they
relate to agriculture, are:—
1. To free the landowner from the necessity of borrowing directly from
the individual creditor.
2. To regulate the payment of interest and principal so as to free the
borrower from the danger and anxiety associated with demands for repayment
under circumstances which made payment impossible.
3. To get rid of usurious rates of interest, putting agriculture in this regard
on the same basis as other business equally secure.
From the effort to meet these conditions arose—
1. Land mortgage bonds.
2. Amortization, the repayment of the principal with the interest at a fixed
rate over a series of years.
3. Co-operative land mortgage credit, the combining of the security of the
many to secure a reduction in the rate of interest.
The reasons advanced in favour of the land mortgage bond are briefly as
follows:—
1. It makes possible the long term mortgage, otherwise impossible, as the
individual money lender would not as a rule be willing to take a mortgage for
a term of fifteen or twenty or thirty years. This can be done by the creation
of a corporate body, the Land Bank, whose existence does not terminate with the
death of the individual.
2. It places between the lender and the borrower an intermediary whose
business it is to safeguard the loan and whose security is unquestioned.
3. It makes a more flexible arrangement for the lender, as his bonds are
always available for sale in case of need or as collateral security of a high order,
if desired.
4. It makes possible the use of the amortization principle, that is the repay-
ment of the principal of the debt by means of small annual instalments along
with the interest, the payment of principal and interest alike coming out of the
annual proceeds of the land.
5. It recognizes also the fact that the mortgage is to be redeemed by produc-
tion from the land, thus establishing the security on a rational basis. The
mortgage is not strictly a real estate mortgage otherwise.
6. It allows that combination of security which makes low rates of interest
possible, if correct principles are followed. In so doing it establishes a reason-
able limit for a mortgage and thus protects both borrower and lender.
7. If the fixed capital is raised in this way, free from personal or other kind
of guarantee, it leaves the total remaining assets of the farmer free as security
for his seasonal requirements for immediate production. This can be used with
the ordinary bank or through the special banks at the will of the borrower.
The aims of the Short Term Credit systems as they exist in Europe and the
Intermediate Credit system as it exists in the United States are:
1. To give to the agriculturist a credit system suited to the seasonal re-
quirements of his occupation.
2. To secure for him rates of interest for this requirement consistent with
the security of his business.
With regard to the first of these aims, it is claimed everywhere by those who
advocate such credit systems that the ordinary banks are not organized to meet
in a normal way the claims of agriculture. It is not necessary in this report
to go over the arguments advanced, as they are quite well known. Briefly it
amounts to this.
xlvili SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The farmer’s business does not usually give him a quick return. His
period of investment is at least nine months or a year as he has to await the
processes of nature to give him his dividends. He is subject to losses by
accident, disease and fluctuations in prices, causes over which he has no control
and which make special financial arrangements necessary often covering a
period considerably longer than that required to produce his yearly crop. Short
Term Credit of three months even with the right of renewal is to him both
inconvenient and embarrassing, as although renewal may be promised the
difficulty in obtaining it is much greater if crop difficulties in the meantime
have arisen. Further, the ordinary commercial banks, organized especially to suit
commercial and industrial conditions, to a large extent fail to appreciate the
position of the farmer, who because of his inability to meet specific banking
practices finds himself, particularly if he is a small farmer, regarded as an
undesirable customer, not because of any fault of his own, but because he is
unable to marshall his assets in a manner to satisfy the bank. Hence the claim
that a special financial organization with a different purpose from that of the
ordinary bank is required.
With regard to the second aim mentioned above, the difficulty to be over-
come arises naturally out of the conditions just stated. If the ordinary com-
mercial bank is incapable of meeting legitimately the farmer’s needs, then he
must either do without working capital or resort to some other means of obtain-
ing it. To do without renders him helpless, unless he has already acquired a
surplus of his own. The only other sources open to him are the private money
lender or the local merchant through whom he may buy his supplies. In either
case, while the credit may be obtained for the length of time required, the cost is
very great, often too great in proportion to his productive capacity. The private
money lender is often more hard-hearted than the banker, while the local
dealer’s credit is generally the most expensive of all. The latter usually con-
siders it necessary to protect himself against loss by increasing the price of his
goods, if sold on credit or by charging a higher rate of interest, if he advances
money.
The Short Term Credit Banks of Europe, the Intermediate Credit Banks of
the United States and a great variety of state supported financial organizations
in other civilized countries have sought to overcome the difficulties stated above
by organizing the security of the farmer on a co-operative or semi-co-operative
basis in such a way as to make possible credit at reasonable rates of interest
and for a length of time suited to his needs.
The foregoing is not to be interpreted as an argument but as an effort to
state in the briefest possible way the point of view and purpose of the Rural
Credit movement. The extent to which these organizations have succeeded will
be apparent later on in this report.
BANKING AND COMMERCE xlix
APPENDIX No. 1
SECTION IIL
RURAL CREDIT IN EUROPE
One of the outstanding facts about modern Europe is the number and
variety of its financial institutions. Private, public and co-operative organiza-
tions have grown up everywhere, often with a view to meet special needs or to
solve special financial problems. In every country the ordinary joint stock
bank is, of course, to be found. Side by side with these are to be found savings
banks working under definite restriction; rural banks specially suited to de
business with the rural communities; public utility banks, that is banks doing
a non-profit-making business; land mortgage banks whose activities are often
confined to land mortgage business or to credit based on land mortgages; gen-
eral joint stock loan companies; state banks doing business on a profit-making
basis in the interest of the State; and finally co-operative banks specially
regulated to assist and stimulte co-operative institutions.
Institutions of all of the above mentioned types give consideration to tlie
problems of agriculture and make loans on the basis of farm land security. I
shall discuss, however, the agricultural credit institutions only; that is, institu-
tions whose function is to deal with problems of agriculture specifically and
whose aim is to give the agriculturist money at rates of interest in relation to
the security offered. These institutions give to the farmer the advantage of
their knowledge of the value of his security and have resulted in establishing
agricultural credit on what is regarded as a rational basis. As a consequence
of their operation the small farmer has been taken out of the hands of the
usurers, whose rates of interest fifty years ago ranged from ten per cent to fifty
per cent, and has been made the cheapest borrower in the country. These
institutions have done more than this. They have had a regulating influence
on the rate of interest charged by all the other financial institutions doing
business with the farmer. jAs an illustration, one might take the position of
the Land Mortgage Credit Associations or the Landschaften in Germany. At
the end of 1912, the financial institutions in Germany lending money on mort-
gages had invested about $6,500,000,000 in various types of mortgage security.
Of this amount over $2,000,000,000 was in farm mortgages. Of this latter
amount the Landschaften held $850,000,000, about 13 per cent of the whole, or
about 40 per cent of that invested in farm mortgages. The rate of interest,
however, was practically that fixed by the Landschaften. The above figures
stood practically unchanged in 1920. In this section of the report attention is
devoted to a description of those institutions whose special aim is to facilitate
agricultural credit, dealing with those of a co-operative or state-aided type, or
a combination of both.
Studied with respect to their purpose, these institutions fall under two
general heads:—
1. Those giving Long Term or Mortgage Credit.
2. Those giving Short Term or Personal Credit.
1. Long Term or Mortgage Credit
Of the institutions giving Long Term or Mortgage Credit the following
are the most important and will be described in some detail:—
(1) The German Landschaften or Land Mortgage Credit Associations.
(2) The German Mortgage Credit Banks.
1—4
l SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
(3) The German Savings Banks.
(4) The Crédit Foncier of France.
(5) The Co-operative Mortgage Credit Banks of Denmark.
(6) Institutions in other Countries of Europe.
Similar institutions found in other parts of Europe which have a !ocal
application or which are varieties of one or the other of the above will be
referred to only when by so doing points of special significance make it neces-
sary.
(1) The German Landschaften or Land Mertgage Credit Associations
The German Landschaften or Land Mortgage Credit Associations were
called into being at.a time so like our own, so far as the difficulties of the agri-
culturist are concerned, that to quote from the discussion of the time seenis
like reading current literature on the subject. They had their origin in the
period following the Seven Years’ War (1755-1763). The land owners who
belonged largely to the nobility and who had depending on them the peasart
pepulation found themselves in great difficulties. ‘Agriculture was in a dis-
astrous state; fields lay untilled, dwelling-houses had been destroyed by fire,
cattle had perished. The landowners lacked the means to carry out any recon-
struction inasmuch as their credit was no longer good and the difficulties in the
way of procuring necessary capital was very great. Interest was not paid
punctually, debts were not discharged, mortgages were foreclosed and insolv-
ency resulted. The confidence of investors in respect to the landowners was
completely shaken. Many mortgage loans were withdrawn. The owners ran
the risk of losing a considerable portion of their property.” In 1759 a mora-
torium was declared. This was revived six years later. ‘“ But this moratorium
merely acted as a palliative as soon as it ceased to be operative, the deficiency
of credit made itself felt with landed proprietors in a still more aggravated
form. Many estates were sold by auction. In addition, there was the cir-
cumstance that the price of cereals, very high during the war, fell sharply
after the peace, and besides the export of wool was forbidden on pain of death.
This meant that even where it had been possible to keep up farms or to restore
them to working order the owners were plunged in difficulties. Credit could
only be obtained from private individuals, at a high rate of interest, since there
were at the time no institutions that could act as intermediaries between land-
owners seeking credit and capitalists seeking investment for their money.”
Such were the circumstances that led to the devising of the first land mortgage
scheme in Europe. The landowners of the Prussia of that day were very much
in the position of those in Western North America to-day. They had land in
abundance but money was scarce and hard to get. Interest charges were ab-
normal and ruin stared many of them in the face.
Within a very short time after the establishment of the Landschaft, the
following statement from a report to the King indicates the change that had
taken place. “ Thanks to the most benevolent support of your Majesty the
credit of the Landschaft is now in an extremely satisfactory state. A remark-
able number of families who for want of money and credit were on the brink
of ruin and are now in a secure position and thoroughly rehabilitated and wil!
im consequence ever cherish admiration and reverence for your Majesty.”
The credit for the scheme belongs to Buhring, a Berlin merchant. He pre-
sented his scheme to Frederick the Great in 1765.
The general idea of the scheme was that the land represented the best
conceivable security, if there could be created by some sound’ system a quotable
security, that is if the real value of the land could be made a basis for a sound
negotiable security it would cause money to flow again freely into the required
BANKING AND COMMERCE li
APPENDIX No. 1
channels. In order to realize his scheme he advised that there be created with
the approval of the state authorities a credit association (landschaft) by per-
sons in need of credit, which on the basis of mortgages issued in its favour
would issue mortgage bonds bearing interest payable to bearer. In this way, the
liability of the individual would not be direct to the investor, the bonds being
guaranteed by the central authority.
' The actual scheme as put into operation in 1770 was a modification of this
suggestion. The fundamental idea, that of placing an intermediary, the credit
asscciation, between the individual borrower and the investor remained as a
foundation stone of the whole structure.
As it stands to-day the Landschaft is an association of borrowers for the
ourpose of securing loans by the issue of bonds secured by mortgages registered
zollectively against their properties. The bonds are not chargeable against any
ir dividual mortgage but against the mortgages taken together. For this borrow-
ing, the landowner is debtor to the association and the association is debtor to
the investor. The borrower pays interest to the association, and the association
to the investor.
The bondholders are secured in. the following manner :—
(a) Mortgages must not be granted beyond two-thirds of the value of the
land. The valuation is fixed after careful appraisement by independent officials,
the basis being the annual productive capacity of the land as shown by ex-
yerience.
(b) Bonds must not be issued in excess of the total amount of the mortgages
besring equal interest.
(c) The amount of debt is being constantly reduced by amortization at
least until a certain definite portion is paid off.
(d) The organizations themselves are non-profit-seeking, and possess no
share capital upon which profits are paid.
(ec) The bonds are secured not only by total mortgages of the association,
but also by its reserves and the accumulated sinking fund payment of mortgages.
(f) Finally, should all other sources fail the incorporated landowners are
responsible in some cases to full value of their property, in others to a given
iimited liability.
These associations are public corporations and are under state super-
vision. This supervision is exercised by a Royal Commission and the articles
of the Credit Association and the regulations must be sanctioned by the Govern-
ment, much as our railroad companies are in Canada. They possess certain
special privileges. One of the permanent officials must have passed the State
examination qualifying him for the office of judge so that they are permitted to
distrain without having recourse to ordinary civil procedure. Within the limits
mentioned above they are autonomous and manage their affairs on the principle
of self-government. The employees have the standing of state officials. It can-
not be over-emphasized that these associations are associations of borrowers,
not lenders; their aim is to save money for their members, not make money
for others. Apart from paying interest on bonds, they have no relation to the in-
vestor who buys his bonds on the market in the usual way. The landowner
becomes a member of the Credit Association when it acquires a mortgage on his
‘and and ceases to be a member when his mortgage has been paid off, so that no
oressure for dividends enters into the conduct of the business.
_ The special merits of these associations are summarized by Mr. J. R. Cahill in
his excellent report for the British Government in the following terms:—
(1) They enable landowners to mobilize, as it were, their landed possessions
by the creation of bonds passing into the general system of securities; instead
1—43
hi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
of only being able, like English landowners to provide a mortgage security of
very restricted currency, German landowners have the advantage of being able
to convert a mortgage charge into a security realizable at any time in the general
market.
(2) Loans granted are not subject to recall.
(3) The rate of interest is as moderate as possible, being closely related to
the prevailing market rates for money.
(4) The bonds being irredeemable by the holder, the rate of interest may
not be raised.
(5) The right is conceded to reduce the debt by payments made at the
mortgagor’s conveniencé.
(6) The necessary extinction of the capital debt is accomplished gradually.
(7) The costs for valuation and other charges are low.
(8) Their administration is at once relatively inexpensive and their office
holders highly qualified for their work.
Of these associations there are twenty-three in Germany having a total
of outstanding loans in 1920 of 3,255,000,000 marks equal at par to about $850,-
00,000. The average pre-war interest was about 4 per cent. That is 4 per cent
bonds were selling at par in 1914. These bonds have always maintained a strong
josition in the market. At the time of the Napoleonic Wars when Prussian four per
cents were quoted at twenty, the land bonds never fell below fifty. In 1920,
the Central Landschaft four per cent bonds were quoted at one hundred, while
in certain of the provinces they were above par. These facts show how firm a
hold after one hundred and fifty years of experience, these securities have on the
investing public in Germany.
(2) The German Mortgage Credit Banks
The Mortgage Credit Banks, of which there are sixteen in Germany, are
all established under the guarantee of some public authority, either a State, a
Province, or a District within a Province. While not restricting their operations
to farm mortgages, they all do a large farm mortgage business. They had in
1913 a total of outstanding loans of $500,000,000, one half of which is in land
mortgages, the other half being to local municipal or communal authorities. The
funds of these institutions are obtained,—
(a) By the issue of bonds guaranteed by State, Province or District in which
it operates. These are recognized by law as trustee securities.
(b) By deposits.
(c) By grants or loans from State or authority concerned.
(d) Payments by borrowers into sinking fund account.
(e) Accumulated funds.
These banks were specially designed to serve the needs of the medium or
small landowner to whom loans are made at moderate rates of interest, on
an amortization plan and not subject to recall.
These banks are usually managed by a special committee in some cases
appointed by the State, in others either wholly or partially by the Assembly
or Council of the public authority guaranteeing the liabilities of the bank. They
are, strictly speaking, public institutions. Any profits accruing from the opera-
tion go to the guaranteeing authority.
_ IT have not been able to obtain information of the standing to-day of these
institutions. In normal times, they were functioning greatly to the advantage
ef the guaranteeing authority and to the borrowers, mostly small farmers and
communal organizations.
BANKING AND COMMERCE hii
APPENDIX No. 1
(3) The German Savings Bank
The German Savings Banks are mortgage credit institutions of very great
importance to farmers. Their total investments in farm mortgages In 1913 were
about $850,000,000. In some parts of Germany they were the chief source of
mortgage credit for the small farmer. Most of these institutions are public
savings banks, established, managed and guaranteed by the public authority.
In 1913 there were 2,844 public savings banks of this type im Germany with
7,404 branches.
The deposits in these banks reached the sum of over $4,000,000,000.
These institutions, being usually under local control and management and
not subject to central control are allowed to fix a rate of interest to suit their
own convenience.
The result is they pay comparatively high interest on deposits, as high
as four per cent. There is no combine to fix rates paid on deposits. The re-
sult is the savings of the district go to the banks and loans are made to those
people living in the same district. The guarantee of the District Authority
makes them absolutely safe.
The charges made on loans are also slightly higher than in the case of
the Landschaften.
Of the total deposits of over $4,000,000,000 in 1913, over $2,500,000,000 was
imvested in mortgages, of which $850,000,000 was invested in farm mortgages.
The exchange in all the figures in this report is based on gold values of the
coinages used.
These institutions are of such great importance in connection with agricultural
credit that the following brief statement concerning them taken from the report
of Mr. Cahill, will not be without interest:—
“The earliest German savings banks were founded to serve as
institutions for safeguarding the poorer classes against absolute poverty
by providing a place for the safe deposit of small sums of money until
such should be required in bad times. Established in connection with the
efforts to reform the poor laws they were regarded rather as philanthropic
institutions. But the savings banks lost this character of philanthropy
early in the nineteenth century, and have developed along the more
general lines of institutions for the furtherance of thrift. They have been
established usually by and under the guarantee of public authorities; and
in normal cases do not aim at profits beyond the obtaining of an adequate
interest upon money deposited with them and the payment of the expenses
of management. Any surpluses remaining after paying these charges
and making suitable appropriations to reserve are applied to objects of
public welfare. In primary aim they are distinguishable from banks in
the ordinary sense of the term; they seek deposits, not in order to be in
a position to grant credit for their own profit, but to foster thrift, and
only to utilize deposits for investments in the interests of the depositors
themselves. But while there is this distinction in their aims, German
savings banks constitute, by reason of their un-exampled development
and freedom of investment credit sources of great importance. Not being
obliged to deposit their funds at interest with the State Treasury, or invest
in stocks and shares only as such banks are constrained to do in some
other countries, but seeking to obtain on investments the best returns
consistent with the absolute security of their funds, they have lent a very
large percentage of their deposits on mortgages, a considerable proportion
of which have been on rural property.”
liv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The special advantage of these banks is that they provide farmers with a
public mortgage institution in their immediate vicinity and facilitate personal
relations between borrower and lender. Its local character and the knowledge
its officers possess of the conditions of the borrowers makes it possible to dispense
with costs in obtaining a loan, especially that caused by a special valuation.
The disadvantages are higher rates of interest, liability of rates of interest to rise
or of recall of loan and the limited facilities for reducing mortgages.
The German Mortgage Credit Banks and the Savings Banks correspond
somewhat to what is now being done in Ontario and Manitoba through the
public credit institutions.
(4) The Crédit Foncier of France
Mortgage credit in France is provided through the agency of the Crédit
Foncier, a Land Credit Bank established in 1852 for that purpose. It is a joint
stock institution subject to legislative control by the French Government.
When organized the Crédit Foncier was given a monopoly for a period of
twenty-five years on all land credit business over a large portion of France. The
monopoly was later extended to the whole country. The period expired in 1877
but no new competing organization has yet been established, so that land credit
still remains a monopoly in France.
The following article of the constitution shows the scheme of capitalization
and the relation of normal capital to loans:—
“The Society’s capital is fixed at 200,000,000 francs. It is designed
as a guarantee of the society’s obligations and especially of the land
(mortgages) and commercial obligation.
“Tt shall be divided into 400,000 shares of 500 francs each, entirely
paid up.
“The amount of the normal capital of the shares shall be maintained
in the proportion of one-twentieth at least of the capital realized by the
issue of bonds in circulation.”
The capital has since been permitted to be raised to 250,000,000 francs on
condition that loans are made in like proportion. Originally the government
subsidized the society to the extent of 10,000,000 francs.
It will be seen that this system in its organization differs from the Landschaft,
in that it is a joint stock organization doing business for profit; the rate of
interest, however, is controlled by the Government and must not exceed the rate
of interest on the bonds by more than six-tenths of one per cent. As we shall
see the Joint Stock Land Bank which forms a part of the system existing in the
United States under the Federal Farm Loan Board, corresponds somewhat to
the Crédit Foncier in that the capital may be subscribed by private investors;
the interest is regulated by law; and the twenty to one ratio of capital to loans
is also fixed:—
The Crédit Foncier grants loans:—
(a) On mortgage security,
(b) To municipalities.
Mortgage loans are made on the security of houses and town property and
on agricultural land.
These loans are made in one of the following forms:—
(a) Short term loan on mortgage, not to exceed nine years, not repayable
by amortization and not repayable till the end of the term. The present rate
of interest on these loans is approximately 5%.
BANKING AND COMMERCE lv
APPENDIX No. 1
(b) Long term loans, which run from ten to seventy years; repayable by
amortization or at the pleasure of the borrower. The rate of interest at present
on these loans is, including amortization, approximately 5%. Such loans are
made for a maximum of not more than one-half the value of the property
mortgaged. In the case of vine-yards, it is only one-third.
(c) Current account loans on mortgage guarantee by opening what is
called a mortgage line of credit. The rate on these loans is about one-third
higher than that on ordinary mortgages, and the loan is repayable in six
months.
Tn addition to the loans made on mortgages, loans are made to muni-
cipalities and public institutions. The rate of interest on these loans is less
than on either of the foregoing. These loans are made for a period of from
one to nine years.
Since its origin in 1852, the Crédit Foncier has loaned more than 9,000,-
000,000 francs, and, in 1913, had outstanding 5,000,000,000, the full amount
allowed under its capitalization. An additional capitalization may have been
permitted since this information was obtained. More than half the loans are in
mortgages.
The share capital of the bank was created to give security to the land
mortgage operations. All mortgage loans are covered by the issue of bonds,
which are sold in the open markets of the country. The borrower is paid in
cash at current price of bonds. The bonds are not guaranteed by the Govern-
ment. They are repayable in a maximum of seventy-five years.
The feature worthy of special attention, is that the Crédit Foncier provides
both the Short Term and Long Term Credit. A mortgage credit being estab-
lished by a property valuation for any client, money can be borrowed against
this, interest being charged only on the money advanced. This is a feature
not found in Germany nor is it copied in the system now in operation in the
United States. The Crédit Foncier thus in a measure serves the purpose for
certain clients of both long term and short term credit bank. The Crédit
Foncier is allowed to take deposits from its clients. It is also permitted, in
default of payment of interest and amortization to sell without notice and
without civil procedure in the courts, as in the Landschaften.
(5) The Co-operative Mortgage Banks of Denmark
The Co-operative Mortgage Banks of Denmark are fashioned after the
German Landschaften and do not therefore demand a lengthy description.
A mortgage bank in Denmark is a credit association composed of landed
proprietors (from the Danish speaking provinces) founded by the sanction
of the King with a view to making it easier for its members to borrow money
upon easy terms upon the mortgage of their estates and by degrees to repay
the sum borrowed. Only borrowers are admitted to the association. The
borrower becomes a member when he delivers to the cashier of the association
a mortgage upon his property and receives his loan in the shape of debentures
of the association. The bonds are then sold to anyone who may wish to buy.
The relationship is specifically defined by regulations in conformity with which
the loan is made. The security for the principal and interest of the mortgage
bond is the sum total of all the mortgages effected by the association.
Bondholders may have their bonds cashed on giving six months’ notice.
Should the demand, however, exceed the amount at the disposal of the bank
- through its sinking and reserve fund, the bondholder must wait until pay-
ments become due from the mortgages. When a bondholder gives notice of his
desire to cash his bond, he is notified the date he can secure payment. Mortgages
ivi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
‘are paid by an amortization scheme in forty-seven years, the amortization
being three-quarters of one per cent of the loan annually. Payment of a
larger amount may be made at the regular payment date, should the mortgagor
desire it. Should the sinking fund thus formed exceed the bonds presented
for cash at any given time, a drawing is made for other bonds to be redeemed.
The members of the association may borrow up to three-fourths of the
value of the property and must pay four per cent interest on mortgages, three-
quarters per cent amortization and one-quarter per cent for expenses, making
altogether 5 per cent. The value of the property is based directly on the
revenue which the borrower can show as accruing annually to him from the
property.
The association is managed either directly by the members through a
general meeting or by a board of directors chosen by a general meeting. The
general meeting is held at least once a year. Full details of their methods
are available if desired.
There are 14 associations of the Landschaft type in Denmark doing first
mortgage business and 9 for second mortgages on small estates. The latter
are the only ones of their kind in Europe.
(6) Institutions in other Countries of Europe
In nearly all other countries in Europe facilities exist in some form for
mortgage credit based either on the German or French model. In Ho.ianp
the government authorized the creation of Joint Stock Mortgage Banks for the
purpose of affiliating the small savings organizations which had arisen in the
villages and country places and were doing mortgage credit. They were not
subsidized by the government and found their money for loans out of the
savings deposited in the small village banks which affiliated with them.
Mortgages are issued for forty years on an amortization plan.
In Austria in pre-war days, the mortgage credit business was mainly in
the hands of the savings banks. Of these six hundred and sixty-nine were in
operation in 1914, mostly in towns and cities. At that date these banks had
invested in mortgages 3,700,000,000 crowns, about 55 per cent in agricultural
property.
Institutions based on the German Landschaften also prevailed and were
rapidly growing in 1914.
In Hungary, a system of state-supported though not state-owned institu-
tions exist. Mortgage bonds are issued against mortgages in the usual way.
In 1911, $500,000,000 worth of such bonds were in circulation, redeemable under
definite regulations. Many of them had been sold in France.
In Iraty, a great number of institutions do agricultural long term mortgage
business. Land Credit Institutions, Land Credit Banks, Savings Banks and
Mutual Societies all exist for the purpose. They grant loans on first mortgages on
a fifty per cent valuation. The amortization period is ten to fifty years. The
annual payments include (a) Interest, (b) Amortization instalments, (c) In-
come tax, (d) Commission and management expense, (e) Revenue and stamp
duties. Bonds are sold, where possible, against the total security of mortgages
held.
In Swepen, there are ten distinct land mortgage associations of the Land-
schaften type created by authority of the Government. These have a monopoly
of the land mortgage business. For these there is a central institution known
as the Swedish General Mortgage Bank which advances money to the district
associations upon the assignment of mortgages taken from the members of the
associations. Members of each association are jointly and severally liable for all
loans made. The central bank is a semi-public institution’ closely associated
with the government and enjoys a monopoly.
BANKING AND COMMERCE Ivii
APPENDIX No. 1
With regard to the security of the land mortgage systems described, it
may be said that the land mortgage bonds are everywhere regarded as the
safest kind of security available for both large and small investors. The pay-
ment of interest and principle is assured by strict government supervision
which prevents over-issue and which sees that all repayments made by bor-
rowers are reserved for repayment of bonds. Their record of accomplishment
is so high that money sufficient for their needs flows freely into their treasury.
(2) Short Term or Personal Credit in Europe
The expression “Short Term or Personal Credit” is used everywhere in
Kurope to include all types of agricultural credit other than mortgage credit.
This form of credit is based mainly on the security of the borrower as indicated
by his general standing in his community and on his personal assets apart
from land.
Only such institutions as devote their attention mainly to agriculture will
be discussed. The ordinary commercial institutions, joint stock banks and
savings banks therefore will not come under review, except as they are part
of an agricultural credit system.
Under the section devoted to general observations I have set forth briefly
the reasons advanced for the development of the institutions herein described.
I quote here only one short paragraph from a document which was prepared
by a distinguished European authority to set forth the reasons for their creation
in Europe.
“Urban bankers being naturally more conversant with commercial
or industrial undertakings are less capable of judging the standing of
a farmer and his business capacity. Credit implies confidence and
facility of supervision; but the banker is unacquainted with farming and
farms are comparatively isolated units, usually more or less remote from;
the banking office. Ordinary commercial tests are not often applicable,
especially where small farmers whose book-keeping is apt to be very
incomplete and unmethodical, are concerned. The same difficulty pre-
sents itself as to proposed sureties who are also likely to be farmers.
Other banking security is often out of the question and the procuring
and bringing of sureties to the bank involves great loss of time and ex-
pense. The world in which the bankers or bank manager moves is
not that of the farmer so that personal knowledge is infrequent. The
whole situation is rendered even more unfavourable by the supplanting
of small country banks by branches of great banks which are directed
on fixed lines from headquarters and whose managers are frequently
changed. Commercial banks cannot, moreover, be brought nearer than
small towns....The smaller farmers offer also little attraction to the
ordinary commercial banks as borrowers, and, apart from other dis-
advantages, pay for the small loan they require an unduly high per-
centage as interest and commission. As a result, farmers cannot obtain
from banks, organized mainly to serve industry and commerce, credit
in suitable amounts at reasonable interest and on security which they
can usually provide. Yet while commercial banks have become less
satisfactory from the standpoint of the farmer, his need for working
capital has greatly increased. More scientific and intensive farming,
made necessary by competition which has been facilitated by improved
and cheapened transport, refrigerating processes, and other causes, re-
quires more capital expenditure on labour, fertilizers, feeding stuffs and
machinery; payment in kind being entirely superseded by payment in cur-
rency, while money wages are higher; and other expenditure including
cash payments to the state and other public authorities has increased.”
lviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The quotation is from a European document and may be taken as a reason-
able statement of the conditions which gave rise to the institutions about to be
described.
Of the institutions in Europe giving short term or personal credit to farmers
the following, of which a short description is given, are the most important:—
(1) The Raiffeisen System of Banks or Credit Societies of Germany.
(2) The Crédit Agricole of France.
(3) Modifications of 1 and 2 found in other parts of Europe as the Rural
Banks and Popular Banks of Italy, Hungary and other countries.
(1) The Raiffeisen System of Banks or Credit Societies of Germany
There are two distinct steps to be taken to complete the organization of
credit on Raiffeisen lines. First the formation among the farmers of local credit
societies and second, the organization of a group of societies into a collective body
federated into a central bank. These societies are based on what are known
as the “Raiffeisen Principles”.
(a) Their legal foundation is the unlimited liability of all their members
for all liabilities of their particular society.
(b) Their aim is to improve the condition, alike material and moral, of
their members. °
(c) They admit only members from a distinct district, which is advisedly
as narrowly circumscribed as is consistent with its being self-supporting; there-
fore, there can be no persons members of more societies than one at any one
time.
(d) They collect no entrance fee.
(e) So far as the law of the land permits, they issue no shares; wherever
the law makes shares obligatory, they limit a member’s holding to one share
only, which must be small; and should dividend be declared on such share, such
dividend must not in rate exceed the interest charged upon loans.
(f) The only officer remunerated for his services is the “accountant” (the
employee who keeps the accounts and actually handles the money); members
of the managing committee and the council of inspection are expected to dis-
charge their duties without remuneration,
(g) All profit resulting is conscientiously carried to an indivisible common
fund belonging to the society as such.
The following statement prepared by the general secretary of the Union of
Co-operative Societies in Germany will serve to make clear their purpose and
mode of operation:—
“The task which credit societies set themselves is to provide the cash
required for advances and credits to be accorded to members; further-
more, to provide for the supply of goods required by members and to
make any other arrangements for the promotion of the material welfare
of their members which may appear desirable; and the aim which they
pursue is to come to the aid of those who are materially weak and to
further the intellectual and moral well-being of their members rather
than to earn a profit. The foundation upon which they are built up is
that of christianity and loyalty; it is a standing rule that at society
gatherings neither denominational nor political subjects may be touched
upon in discussion.
“These societies are not allowed to engage in any speculative business
whatever. {Advances and credits are permitted only to members on
personal security, and for objects held to be economically legitimate, in
BANKING AND COMMERCE lix
APPENDIX No. 1
the shape either of specific loans or else of current accounts. Adequate
security must be provided for every loan or credit to be granted. And in
respect of every loan the term for repayment is fixed in advance, the
length of time and the amount of the instalments for repayment are in
every case proportioned to the object of the loan and the power of the
borrower to repay within a given time. No loan is granted without
consideration of the object for which it is asked and the capacity and
title of the borrower to answer for a credit. Borrowers are, on their
side, entitled to repay at any time. In respect of certain contingencies
the societies reserve to themselves the right of calling in the loan.”
When the system is fully organized, it consists of a group of these local
societies, each as independent unit, but federated into a Central Bank. The
Central Bank acts as a clearing house for the group. It makes it possible to
confine the action of the local society to a small group in a fixed district, thus
making collective action possible. The Central Bank also serves as a pur-
chasing agency for agricultural requirements and a selling agency for agricultural
products.
The Central Bank is a joint stock company, but its shares are held only by
the local societies or certain officials of the institution.
The objects of the Bank are:—
(a) To carry on banking and credit business, more particularly as a means
of equalizing temporary shortness or oversupply of cash in local banks.
(6) To provide for collective purchase of agricultural requirements, as
well as for collective sale of agricultural produce.
The money required for the business of the Bank is provided as follows:—
(a) By the issue of shares to local societies.
(b) By deposits received and loans raised.
(c) By commissions charged and a margin of interest on business transacted.
(d) By profits on the dealing in goods and by similar income.
The money so raised is applied as follows:—
(a) In credits given in current account to local co-operative banks, societies,
central banks formed for particular counties or provinces, co-operative societies.
(6) For carrying on a business in goods.
(c) For discounting acceptance and making advances in approved securities
in conformity with the practice of the Inperial Bank.
(d) For any other purpose in harmony with the general objects of the
institution.
The profits realized are applied as follows:—
(a) To the accumulation of a reserve fund.
(6) To the payment of a dividend on shares, which must not in any case
exceed four per cent.
Each local society has a credit fixed by the managing committee of the
Central Bank. This credit is based on the valuation of the possessions of the
members of the society, the liability being unlimited, that is, each member is
jointly responsible for the whole of the obligations of the local society to which
he belongs. The borrowing power of each member of a local society is fixed by
the local society.
The adjustment of assessment to determine the maximum credit of the
local society is made every three years.
The business transacted between the local society and the central bank
is as follows: “Should the funds collected locally by the branch offices prove
insufficient for their daily requirements, those offices are to apply to the central
bank for the balance needed. Such amount is furnished either in cash out
of the balance in hand, or else by means of a draft on the Imperial Bank. Sur-
iz SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
plus funds held by the branch offices are in the same way paid in to the Central
Bank. Each branch office is required to send in to the Central Bank every week
a return of its transactions and holdings in cash, and every month a full return
showing the whole state of its business. By such means the Central Bank is
enabled to exercise a steady and effective control over the branches. In addition,
each branch office is subjected once every year to a minute inspection carried
.out, in conjunction with the chief inspector of the union, by a committee
nominated by the Council of inspection of the central bank.
“Tn this manner the Agricultural Central Bank for Germany has, in spite
of its formation as a joint stock company, been enabled to retain its genuinely
co-operative character, transacting business in its wider sphere practically on the
same co-operative lines as the local credit societies do on a small scale. Its
being registrared as a joint stock company facilitates its business with the
money markets, and provides for it, through its share capital, a working fund
which cannot be affected by any changes occurring which influence local
societies. Keeping the money transactions with societies in its own hands, it is
in a position to charge lower rates than societies would be saddled with, were
the business to be carried on through the medium of independent provincial
intermediate institutions; and by means of its branch offices it secures to itself
all that information respecting the financial status of local societies which is
imperatively needed for the appropriate apportionment of credit. It is, there-
fore, a central bank based entirely upon self-help and self-government, and com-
bining in itself all the advantages both of a centralized and a decentralized
clearing house for money.”
As already mentioned, these societies are not only co-operative agencies for
obtaining credit, but also for the purchase and supply of farm requirements, and
for the sale of farm produce. Within it are organizations for the purchase of
fertilizers, feed, farm machinery and the collective sale of all kinds of farm
produce.
In Germany there is a general Union of the Raiffeisen Societies with other
types of co-operative societies such as co-operative dairies, etc. All these are
under the caption of the “General Union of Rural Socieites”. Its aim is education.
At the close of the year 1913 there were 25,576 of these socities in Germany, of
which 16,927 were loan and savings banks of hte type described above.
These credit societies have practically banished usury from the communities
where they are organized. Any farmer of good standing in his community, who
has established a reputation of honesty, may obtain his working capital on
reasonable terms. In 1913 these societies had out on loan 1,800,000,000 marks
at rates from four to five per cent.
All this was not accomplished by magic. It followed on a determined and
systematic effort, running through a long period of years to establish credit
on a basis of security which reduces to a minimum the liability of loss. In
other words, this has been made possible because the security offreed is of
such a character as to make serious loss to the lender almost impossible. The
three essential facts of the security are:—
(a) The unlimited lability of all members of the society.
(6) The money borrowed must be put to productive uses.
(c) The operations of the individual society is limited to a small, well
defined area.
(2) The Crédit Agricole of France
The agricultural credit system as worked in France is the outstanding
example in Europe of a credit system involving co-operation among borrowers
either on the principle of limited or unlimited liability, and state aid. It is 4
state-aided co-operative system.
BANKING AND COMMERCE Ixi
APPENDIX No. 1
This system was created by a law passed in 1894 which took for its nucleus
of organization the small unions and agricultural syndicates already in operation
in local communities. The following statement from Senator Albert Viger of
France for some years President of the National Federation of Agricultural
- Co-operative Associations indicates the idea behind the scheme:—
“The first step toward the establishment of an Agricultural Credit
System in France was to organize rural credit from below, to see that
the roots were firmly fixed in the agricultural population itself. An
idea formerly prevailed in France as in other countries that agricultural
credit could only be established by the formation of great central banks
from whence credit could flow out to all the local centres. When the
government of France finally took up the question of agricultural credit
in earnest, it was planned on an entirely different principle. It was de-
cided that agricultural credit should begin with the lowest group; that
the co-operative agricultural society or syndicate should form its own
credit bank and that these should grow from below. Under the French
system we therefore have the credit syndicate and out of these the de-
partmental banks (Regional Banks) usually located in the principal
towns and finally the Central Federation of credit over which I preside.
The development of the system has been from the growth of the small
unit.”
It will be seen, therefore, that the unit of organization like that of the Raif-
feisen system is the small group in the community organized for the purpose
of facilitating the credit of the group. There are 4,000 of these local groups or
banks organized in France; 1,000 on the principle of unlimited liability; 3,000
with limited liability. A bill is now before the French Parliament compelling
the principle of unlimited liability. The system is highly specialized and in-
cludes only the farmers of the community.
In 1899, a system of Regional Banks was founded of which there are 100
now in operation. These correspond to the Central Banks of the Raiffeisen
system. Each of the four thousand local banks functions through one of
the Regional Banks. These are joint stock banks fostered by the state but not
state-owned. State aid is granted on condition that they submit to state super-
vision. This aid stimulates their development so that to-day the system em-
braces the whole nation.
The Regional Banks were organized for two reasons :-—
(a) To discount the bills of the local bank and to endorse them for the
Bank of France. This was necessary because the Bank of France is not per-
mitted by law to discount bills with less than three signatures. The endorse-
ments of the farmer, the local bank and the regional bank, fulfil this condition.
Further, it places between the Bank of France and the local unit an intermediary
capable, from intimate knowledge, of valuing the security offered.
(b) The regional banks were further necessary as a medium for distributing
the funds placed at the disposal of agricultural credit, by the Government. Each
one receives from the government through the Bank of France four times the
amount of its paid-up capital. This amount it uses as a reserve fund on deposit
with the Bank of France to secure its credit for discounting purposes. The
money for this is found as follows:
The charter of the Bank of France having expired in 1896, was renewed
by the Government under certain conditions favourable to agriculture. The
conditions were:
Ixii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
First, that the Bank of France must advance to the Government the sum of
40,000,000 francs, free of interest, to use in subsidizing the rural credit organ-
izations.
Second, that it pay annually a certain portion of its yearly profits as an
advance for agricultural credit. This conditional advance was to be not less’
than 2,000,000 francs. It has varied between 4,000,000 francs and 5,000,000
francs annually.
The law of 1896 fixed the annual advance from profits as twelve and one-
half per cent, of the net profits on discount business done by the Bank of France.
In 1911, when this charter was again renewed this percentage was increased
to 14%4 per cent when the discount rate was 34 per cent and to 162 per cent
when the discount rate was 4 per cent. The money provided in this way up to
1920 amounted approximately 200,000,000 francs.
When the charter of the Bank of France was renewed a committee was
appointed composed of members of the Senate, representatives of the local banks,
directors of the Bank of France and certain other persons through whom the
funds provided as above should be distributed to the Regional Banks.
In the operation of these banks three forms of credit are granted:
(a) Short term personal credit.
(b) Long term collective credit (non-mortgage).
(c) Long term personal credit.
(a) Short Term Personal Credit
This form of credit is given generally for one year. It is strictly personal;
only the endorsement of someone of known responsibility is required. The local
associations endorses and recommends to the Regional Bank which in turn, should
it not have the money, endorses to the Bank of France. As the Bank of France
is not allowed to make a loan for a longer period than three months, the ad-
vance is made for that period subject to renewal. In one year 85,000,000
francs were loaned in this way, of which 60,000,000 were from money provided
by the state.
(b) Long Term Collective Credit (Non-Mortgage)
The main purpose of this form of credit is to promote the prosperity of the
farmers with small holdings. It makes it possible for a group to unite for the
production, conservation or marketing of the products actually produced by the
members of the association. The members must be really engaged in produc-
tion. The rate of interest on this form of credit must not exceed 4 per cent.
The period of the loan must not exceed twenty-five years. The total loans to one
society are limited to twice the capital of the society. This form of long term
credit is not found in any other country in Europe.
(c) Long Term Personal Credit
The following statement from M. Vinreux, of the Crédit Foncier, will explain
this kind of credit:
“The law of 1910, providing for personal long term agricultural credit, is
the latest stone in the structure of agricultural credit in France. This form of
credit is granted by the local banks through the Regional Banks, which receive
money for this purpose out of the advance made for the purposes of agricultural
credit by the Bank of France. It is only granted to small agricultural holdings,
for the purpose of the law is to attach the small peasant farmer to the soil.”
BANKING AND COMMERCE Ixiii
APPENDIX No. 1
The maximum period for which the loan runs is fifteen years and is only
allowed in the case of young farmers. The purpose is to assist the small farmer
to purchase holdings and to encourage young men who have finished their mili-
tary service to take up a farm.
The loans are extinguishable by amortization, and the rate of interest is,
as a rule, two per cent. A mortgage on property may be taken but life insurance
policies and surety security are accepted.
The French local societies differ from the German ones in certain particulars.
They sell shares but only to persons who are already members of some profes-
sional agricultural syndicate or agricultural co-operative insurance association.
While they may receive deposits a definite maximum is fixed in relation to paid
up capital.
Unlike the German societies, the withdrawal of a member does not terminate
his liability until the obligations assumed during his membership have been
settled. Further, the principle of one man one vote does not apply, voting being
based on shares held. In addition, loans may be made by the local society from
its own funds for productive uses to farmers who are not members. The Regional
Bank, however, with which the local society is affiliated, is not permitted to dis-
count loans made to non-members. Lastly, no state aid is given to the local bank
as such. All state aid is given to the Regional Banks which make loans directly
to the person endorsed by the local society. As these organizations have a mono-
poly with respect to Government assistance, co-operation on the part of the
farmer is almost compulsory.
Reference has been made so often in the foregoing to the Bank of France,
that a word of explanation seems necessary. The Bank of France is a bank of
issue; that is, its function is to issue paper money and re-imburse it. It issues
notes either against deposits or on the guarantee of credit operations. It is pro-
hibited from issuing loans on any other basis. The repayment of the paper francs
in circulation is guaranteed either in coin or commercial paper protected by
bonds.
_The Bank of France assists agriculture in three ways. First, in conformity
with regulations mentioned above it assists the individual agriculturist by facilit-
ating loans and discounts. Second, it makes possible the work of the agricultural
banks by rediscounting for the Regional Banks and other commercial banks.
Third, it provides the government with funds with which to supply the needs
of the agricultural credit banks.
(3) Modifications of (1) and (2) Found in Other Parts of Europe
Many variations of the foregoing types of credit institutions for personal
credit are found in various parts of Europe. Nearly every country has found
some modification necessary to suit its own requirements. In Italy personal credit
is granted by both state and co-operative institutions. The aid of the state, as
in France generally finds its way to the borrower through these co-operative
institutions, and not directly to the individuals. By means of special legislation
the Government of Italy has made provision to the extent of over $14,000,000 for
agricultural loans at reasonable rates of interest, a maximum of six per cent being
charged.
The co-operative banks of Italy are based on the ideas before mentioned.
As applied to Italy they are known as—
(a) The Peoples Banks, organized by Luigi Luzzatti.
(b) The Rural Banks, organized by the Leone Wollenborg.
The inspiration in each case came from Germany and is but the application
of known principles. There are about 2,000 banks of the second class in Italy of
which two-thirds are under the ‘control of the church. :
Ixiv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
In nearly every other country of Europe similar institutions exist for the
promotion of agricultural credit. It is not too much to say that these institutions
have been one of the most important factors in improving rural conditions in
Europe. As stated by one who is an enthusiastic admirer of them, “ The use of
credit in agriculture may be compared to the use of water. If the water is
brought into the field at the right time, in the proper way, and in proper quan-
tities, it will be valuable; but if the field is flooded or if the water is applied at
the wrong time, it will be destructive.” These societies have aimed to apply
credit to productive purposes and without question have attained their object.
BANKING AND COMMERCE Ixv
APPENDIX No. 1
SECTION III
RURAL CREDIT IN THE BRITISH EMPIRE OUTSIDE OF CANADA
The United Kingdom
Co-operation for the purpose of promoting agriculture and carrying with it
the organization of co-operative credit, began in the United Kingdom in the
year 1895. At first, it was mainly confined to Ireland, where the Irish, Agri-
cultural Organization Society was promoted. Development began in England
in 1901 and in 1905 in Scotland, where societies were established following the
Irish pattern established by Sir Horace Plunkett. The following statement
from Sir Horace Plunkett indicates the principle on which the institutions were
organized—“The keynote of our proposals is in the proposition that the farmers
must work out their own salvation, and, further, that this can only be done
by combination among themselves.”
The objects set before them were ‘“‘to secure the co-operation of all con-
nected with the land, whether owners, occupiers, or labourers, and to promote
the formation of agricultural co-operative societies for the purchase of requis-
ites, for the sale of produce, for agricultural‘ credit banking and insurance and
for all other forms of co-operation for the benefit of agriculture.”’
Under the Agricultural Organization Society, all organizations were allowed
to affiliate, which aimed at co-operation. By 1914, out of 495 co-operative
societies organized in Great Britain and affiliated, there were 48 credit societies
and one central co-operative agricultural bank. It is with the activities of the
agricultural co-operative credit societies that we are specially concerned.
The following statement issued by the Board of Agriculture and Fisheries
in 1912 indicates the point of view of the British authorities with respect to
these societies :—
“Tt is possible to form an agricultural co-operative credit society
under the Industrial and Frovident Societies Act, with shares and share
capital and limited liability; but, as a matter of fact, all the societies
of this character now in existence in England and Wales have been
registered under the Friendly Societies Act, 1896, and the special author-
ity granted by the treasury in accordance with section 8 (5) of that
Act. <A society registered under that authority must have for its object
the creation of funds by monthly or other subscriptions, to be lent out
to, or invested for, the members of the society, or for their benefit, and
must have in its rules provisions that no part of its funds shall be
divided by way of profit, bonus, dividend or otherwise among its mem-
bers, and that all money lent to members shall be applied to such pur-
pose as the society or its committee of management may approve.”
Unlimited Liability
All the societies organized under the Friendly Societies Act in Great Britain
are unlimited liability societies, that is, every member of the socity is, equally
with every other member, jointly and severally liable for all debts incurred by.
the society and for any loan which any member or his sureties may fail to pay.
No one is admitted as a member to a society unless he lives within a certain
prescribed area, such as a parish or two or more adjoining parishes. He must
1—5
Ixvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
also be approved by the committee as a man of good character, worthy of
admission to the society. All the members have an equal voice in the election
af the committee of management.
Through these societies, loans are made to members on approved security
for a specific purpose of such a productive nature that the loan may be repaid
through the activity in which it is invested. The maximum loan is £50.
Deposits
The societies are permitted to receive deposits either from members or
non-members and to pay interest on them. All profits are carried to a reserve
fund for the purpose of meeting possible losses and no dividends are permitted.
The only benefit which any person receives by becoming a member of the
society is the special benefit of receiving loans.
The loans are taken out for any purposes likely, in the opinion of the loan-
ing committee, to prove profitable, such as the purchase of sheep, pigs, cattle,
horses, to procure seed, plants or manure, or for the employment of extra
inbour, and are made repayable at the time when the borrower may expect
to reap the return of his expenditure, generally running from six to twelve
months. Loans are granted for a period of two years under certain special
conditions.
The rate of interest varies from 44 per cent to 6 per cent.
The total amount of loans under these societies is not large and they have
not played a very large part in the development of agriculture in Great Britain.
Perhaps the chief reason for this is the unpopularity in Britain of the principle
cf unlimited lability and the fact that Great Britain is served so thoroughly
by joint stock banks as compared with other countries on «he continent of
Europe.
Some of the joint stock banks have been willing to assist in financing these
societies; in fact, many of them have offered their co-operation but even this
did not assist the growth to any considerable extent.
In Ireland, organization of credit societies of the type just described has
been much more rapid. In 1913, there were 236 of these credit societies in
Ireland, with a total membership of 19,105 and a loan capital of approximately
$275,000 and a turnover of about the same amount.
This probably represents the position in the United Kingdom at the out-
break of the war so far as Short Term Credit was organized among the farmers.
Long Term Credit
Long term credit in Great Britain has always been regarded as a field for
private enterprise. In order that permanent improvements might be carried
out by land owners, special corporations were organized, under government
regulation, but without government assistance, for the purpose of making loans
to farmers. For example, the General Land Drainage Company was formed
in 1849, the Land Improvements Company in 1853, the Scottish Drainage and
Improvement Company in 1856 and the Land Loan and Enfranchisement Com-
pany in 1860. The first and last of these just mentioned were absorbed into
the Land Improvements Company in 1864.
All these companies were authorized under statutory authority which per-
mitted charges to be made against estates. The interest was limited to 5 per
cent. Since the war, it has been found necessary to remove the 5 per cent
iimit and to allow the rate of interest to be fixed by the Board of Agriculture.
The Improvement of Lands Act of 1864, authorized land owners to raise
loans on mortgages against their estates. From its inception the Land Improve-
ments Company authorized under the Act advanced approximately £13,000,000
for various improvement purposes.
BANKING AND COMMERCE Ixvii
APPENDIX No. 1
There was a similar organization for Scotland.
Under these schemes, money is advanced for the erection of farm buildings
and cottages, for the making of roads, sewers, drains and for the erection
of silos. Before the loan is made, the application must be submitted to the
Department of Agriculture and Fisheries for inspection and approval. The loans
are repayable by an annuity for a prescribed period, which varies from 15 to
40 years, according to the nature of the improvements.
The mortgage given ranks prior to existing mortgages, but not as against
statutory taxes. As these mortgages are usually assignable to insurance comp-
anies, who seek them for investment purposes, the resources of the company are
very great and money has always been easily available.
Under a general statute of Great Britain, machinery is created for the
organization of other companies to do corresponding work so that there is a
basis for the development of regulated private enterprise in this connection to
a very considerable extent.
During the war, the position of agriculture in England underwent a great
change. There was an increase in England and Wales of over 21,000 land-
holders as compared with 1914, and in Scotland an increase of 1,600. The
majority of these purchases took place between June, 1919, and June, 1921, the
total involving a change in ownership of approximately 2,000,000 acres of
farm lands.
There were two reasons for this—(a) There was a desire on the part of
many landowners on account of heavy taxation to dispose of their land, and (b)
a keen demand for the purchase of farms for the purpose of land settlement,
due to the increased price of farm products. In October, 1919, the then Prime
Minister gave the farmers an assurance that the prices of staple products would
be maintained in case of the markets falling, so as to safeguard them against
serious loss. This was put upon the statute book in 1920, a sliding scale being
fixed, based upon the 1919 cost of production. This was the period during which
so much land was purchased and at prices beyond normal values. The following
year, 1921, conditions had arisen which made it impossible to carry out the
provisions of the statute of 1920 and it was repealed.
A committee was appointed by parliament in 1923 to make an investigation
into the whole matter and decided that “the plea that the farmer was induced
to buy land! by the representations made by the Government has undoubtedly a
solid foundation,’ and, therefore, some scheme of relief was necessary.
The fall in prices further produced generally a condition with regard to the
farmers in England that was brought about by the fall of prices in both
Canada and the United States. A great deal of the money used in the purchase
of lands had been borrowed from the banks by means of overdrafts and, as the
banks were not allowed to take mortgages, the position of both banks and
farmers was considered precarious.
The same committee went into the whole question of short term credit for
farmers to meet their current needs and examined the facilities that were offered
by the banks and the conditions under which loans were made. It is not
necessary in this report to go into the details of the enquiry. Suffice it to say
that the relation of the banks, the credit of merchants and dealers were all
inquired into. It was found that there was outstanding approximately £46,000,-
000 on loans to farmers from the banks, of which £26,000,000 had been
advanced for the purchase of land and £20,000,000 for normal current. pro-
duction. The committee was of the opinion that bank facilities were, in the
main, available to farmers in gnod standing, but that a large class of small
1—53
iXViil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
farmers, who did not easily have access to the banks, had not credit facilities
necessary to make a success of their occupation. Recommendations were, there-
fore, made covering both the long term and short term credit and were incor-
porated into an act of parliament, which was passed July 31st, 1923.
Provisions nnder Act, July 1923, for Long Term Loans
Under this Act, power is given to the Public Works Loan Commissioners to
lend money to associations created for the purpose of making advances upon
farm mortgages at any time within five years after the passing of the Act, the
total amount to be subject to the approval of the Treasury and under
conditions which the Treasury may prescribe. The borrower must be a person
who had agreed to purchase the land comprised in the mortgage not earlier than
the 5th day of April, 1917, and not later than the 27th June, 1921. The object
of this is to cover the period of inflated land prices.
The land comprised in the mortgage must be wholly or mainly agricultural
land.
The amount of the loan must not exceed 75 per cent of the value ascertained
to the satisfaction of the Commissioners, or exceed an amount equal to thirty
times the annual value of the land as ascertained for income tax purposes.
The rate of interest is to be fixed by the Treasury.
The loan is repayable in sixty years by yearly instalments of the principal
advanced, together with interest charges.
The land must be free-hold or copy-hold land.
The advance is made by the Commissioners to an Approved Association,
which, in turn, secures the mortgage on the property.
“For the purpose of the Act, the expression ‘Approved Association’ means
an association which is approved by the Treasury for the purposes of this Act
and which does not trade for profit and by its constitution or otherwise is
restricted in relation to the rate of interest on loan capital and the distribution
of profits among its members, so as to comply with regulations made in that
behalf by the Treasury.”
The sections of the act referring to Long Term Credit, as previously stated,
are designed to assist recent purchasers of land.
Provisions under Act, 1923, for Short Term Loans
The Act further calls upon the Minister of Agriculture and Fisheries to
“take such steps as: are practicable to promote the formation or extension of
Agricultural Credit Societies, that 1s to say, societies approved by the Minister
and registered under the Industrial and Provident Societies Act, 1893, having
for their object or one of their objects, the making of advances to members of
the society repayable within a period not exceeding five years for such agri-
cultural purposes as may be approved by the Minister.”
The Minister of Agriculture and Fisheries is authorized at any time within
three years after the passing of the Act, or during such additional period as the
Treasury may prescribe to make advances to such societies to an amount equal
to the amount of shares held by members of the society and of which at least
25 per cent has been paid up. This is clearly an effort to create a greater interest
in the Agricultural Credit Societies mentioned earlier in this section.
The Act is made, subject to certain modifications, to apply to Scotland.
The Act is cited as the “Agricultural Credits Act of 1923.”
In this report I have not taken cognizance of special Acts for the purchase
of land from landowners, such as the enactments for the purchase of land in
Treland.
It is expected that, under the stimulation of government assistance, the
Credit Societies will have a rapid development, especially among small] farmers,
The overcoming of the individualistic tendencies of the British farmer, however,
is likely to be a slow process.
BANKING AND COMMERCE Ixix
APPENDIX No. 1
The Commonwealth of Australia
In all the States of the Australian Commonwealth, provision is made for
loans from government sources to farmers, both for short term and long term
credit. In most of the States, advances are made as loans to settlers, advances for
the purchase of farms, and advances under the Returned Soldiers’ Settlement Act.
The Commonwealth government has contributed by advances to the various
States to meet the requirements of the Returned Soldiers’ Settlement Act. These
advances to the States up to June 30th, 1923, amounted to approximately
£32,866 ,000.
New South Wales
In New South Wales, there is a Government Savings Bank with a Rural
Credits Department. Through the Rural Credits Department all advances are
made to settlers. For Short Term loans, these advances are made as over-
drafts on current account. For Long Term loans they are made on first mort-
gages with an amortization period of 31 years. The limits of the loans made
under the Act are £50 to £2,000. They may be made,—
(1) for the purchase of farms, in which case advances must not exceed
80 per cent of the valuation of the security and are limited to £1,250;
(2) for land held in fee simple; the loan must not exceed 66 per cent of
the security;
(3) not exceeding £500 in the case of homestead lands, provided that this
does not exceed the value of the improvements on the land;
Loans may also be made on land leased for a period of years on a basis
of 50 per cent of the security which the borrower can offer.
The savings banks are under a Board of Commissioners, to whom is given
the authority to make loans.
As the advances to returned soldiers are under a special act for a special
purpose, I am not entering into a discussion of these loans.
Victoria
In the State of Victoria, the State Savings Bank is the institution through
which money is advanced to settlers. Under this bank there is a loan mortgage
department created for the express purpose of making loans to settlers. This
department is authorized to borrow up to £10,000,000 for the purpose of making
loans. The bank is controlled by a Board of Commissioners on whom is con-
ferred the authority to decide on loans.
The limits of the loans are the same as in New South Wales, viz., £50
to £2,000, a limit of two-thirds of the value of the security offered.
In the case of special land used for vineyards, hop-grounds, orchards, etc.,
advances may be made to a much larger limit, subject to the will of the com-
missioners.
Mortgage bonds may be sold for the purposes of the Act and the loan may
be made in cash or in mortgage bonds at a price fixed by the commissioners,
Victoria has, in addition to this State Savings Bank Act, an Act called “The
Closer Settlement Act,” which is under a board known as “The Closer Settle-
ment Board,” through which loans, so far as agriculture is concerned, may be
made,—
(1) to agricultural labourers on allotments in aid of the cost of fencing
and erecting dwelling houses;
(2) to lesses of crown lands for carrying on farming or grazing pursuits
and to owners of land for the purchase of fencing, ete.
The interest fixed is 5% and the repayments are made on the basis of forty
half-yearly instalments.
Ixx } SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Queensland
In Queensland, advances are made under a State Advances Act and the
Co-operative Agricultural Production Act. Under the State Advances Act,
the board of management may make advances to property owners for any of
the general purposes of agriculture against’ first mortgage on property. The
limit of advances is £1,200 and in no case to exceed 75 per cent of the value of
the property.
Advances may be made to purchase property or to refund indebtedness
for agricultural purposes, to purchase stock and implements, to effect improve-
ments or any general agricultural productive purposes.
The loan is repayable in 20 years in half-yearly instalments.
The interest rate is 5%. Interest only is payable during the first five
years, amortization beginning after the end of the five year period.
Under the Act known as ‘“‘ The Co-operative Agricultural Production Act”’,
advances may be made to any co-operative organization engaged in manu-
facturing processes relating to agriculture. These loans may be made up to
two-thirds of the entire cost of the machinery and buildings necessary for the
process.
This Law calls for the organization of associations with capital shares of
which at least two-thirds must be held by producers. Upon the shares no
dividend greater than six per cent is permitted. The security in this case is a
first mortgage on property.
South Australia
In South Australia, there are a number of Acts, under which advances may
be made to farmers out of government funds, of which the most important are:—
(1) The Crown Lands Act. Under this Act, advances may be made to
homestead holders for erecting buildings and making improvements on their
land. The limit of loan is £50.
(2) The Advance to Settlers on Crown Lands Act. Under this Act there
is a Board known as the Advances to Settlers Board, which is authorized to
make advances to any settler on the security of his land and improvements, for
the punpose of making improvements, the limit being £400. An additional loan
of £250 can be made provided this is not greater than three-fourths of the excess
value above £400 of the property. The loan may be made for discharging exist-
ing mortgage or for any other productive purpose, if satisfactory to the Board.
Interest only is required on the loan for the first five years and from that
time it is amortized by half-yearly instalments in thirty years.
(3) The State Advances Act. The State Advances Act is similar to the
State Advances Act previously described. Loans under this act cannot exceed
£5,000 and must be repaid within 42 years. The loan is based on a three-fifths
value of the property.
(4) The Irrigation Act. Under this Act, there is a Commission known as
The Irrigation Commission, which may make loans on leased property for the
purpose of clearing, fencing, constructing channels or drains, or for erecting
buildings. A limit of £600 is fixed. In addition to this, £200 may be advanced
for the purpose of improvements, stocks, etc. An additional loan may be made
for refunding in the case of mortgage property.
(5) Under the Loans to Producers Act, the Minister of Agriculture may,
on the security of a mortgage on the property, make loans to any registered
co-operative society, three-fourths of whose members are engaged in agriculture.
This money can be applied to the erection of factories, packing houses, etzc.,
etc., the Minister being protected by first mortgage on the property.
>
BANKING AND COMMERCE Ixxi
APPENDIX No. 1
(6) There is one other Act, known as The Agricultural Graduates Land
Settlement Act. So far as I am aware, this is the only act of its kind in
existence. Under the provisions of this Act, the government is authorized to
purchase land with a view to the settlement of graduates of agricultural colleges.
Loans under this Act may be made up to £3,000 for each graduate and an
additional £500 for the purpose of purchasing seed, implements, etc. During
the first three years, interest only is payable and the capital in half-yearly
instalments during the following six years.
Western Australia
In Western Australia, an Agricultural Bank was established in 1895. The
management of this Bank has authority to make advances up to £2,000 on the
security of first mortgages to persons engaged in agricultural pursuits. Advances
are repayable over a period of 30 years. Interest only is payable during the
first ten years and the principal on an amortization plan with the interest during
the remaining 20 years.
Tasmania
In Tasmania advances are made to farmers and producers under three
separate Acts, functioning in a manner similar to those in the other States.
Those are (1) The Advances Act, (2) The Closer Settlement Act, and (3) The
Advance to Fruit Growers Act.
Under the various Acts described there was loaned, during the
Vesti eee, a0 oe, UStrAlAM CLAGeSem)< oo. Le oh esos spar) SL2,801,7aL
iifenvolalvackwameesmcoriabe Wels) neice oe cos ce ee | £01 o28,c00
And the outstanding balances in all the states amounted to.. .. .. £53,913,716
The Union of South Africa
For the purpose of promoting agricultural credit, the “Land and Agri-
cultural Bank of South Africa” was established in 1912. Before the establish-
ment of the Union of South Africa, a number of the parts which entered into
’ the Union had loan banks of their own; for example, the “ Transvaal Land and
Agricultural Bank,” “The Land and Agricultural Loan Fund of the Orange
Free State,” “The Land and Agricultural Loan Fund of Natal,” “The Agri-
cultural Credit Bank in the Cape of Good Hope.” The latter bank had, how-
ever, never been operated. With the establishment of the Land and Agri-
cultural Bank of South Africa in 1912, all the provincial banks ceased to exist
and their assets and liabilities were transferred into the new bank, cited as
“The Union Land Bank.”
When the Union Land Bank started business, it had a capital of £2,735,000,
derived from the provincial banks on the basis of the settlement under which
the amalgamation was effected. In addition to this, its capital consists of—
Such monies as the parliament may from time to time appropriate and such
amounts as may be recovered from loans under certain old enactments which
become part of the general scheme, and such further amounts as the bank may
be able to raise for the purpose of financing co-operative societies by means
of—
(1) discounting with other banks bills of co-operative societies,
(2) overdrafts with other banks,
(3) issuing Land Bank bills.
Up to the end of 1922, Parliament had authorized advances to just over
£4,000,000. On account of the war, however, all of this had not been paid
into the funds of the bank, but £3,060,361 were actually paid in by the Minister
Ixxil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
of Finance. In the meantime, approximately £340,000 has been added to the
bank as a result of collections under the arrangements mentioned above. The
total capital of the bank, therefore, at the end of 1922 was approximately
£6,000,000. P
On this amount Parliament has authorized the payment of 3} per cent,
but by resolution of Parliament, the interest charges varied during the period
of the war. At the moment, the bank is returning to the state an amount in
excess of the cost of the money raised by the state.
This bank is under the management of a central board, appointed by the
Governor General, consisting of a general manager and four other members.
In addition, local boards have been established at Cape Town, at Port Eliza-
beth and at Bloemfontein, for advisory purposes only, the headquarters of the
bank being at Pretoria,
Under the Act, every magistrate, field cornet and police officer and the
Postmaster General and any officer under him are by law agents of the bank
when required by the central board to give assistance.
The main objects of the Bank, in so far as they affect agriculture, are—
(1) to make advances to farmers against the security of first mortgage
on agricultural and pastoral lands. Advances cannot be greater than
60 per cent of the appraised value of the land nor greater than a
maximum of £2,000;
(2) to make advances to agricultural co-operative societies against the
security of the joint liability of the members for the society’s debts;
(8) to make advances to farmers to construct dipping tanks, silos and
other contrivances for the making or storage of ensilage and to erect
boundary fences;
(4) to make advances to settlers who hold land from the Crown under
lease or license. In addition, advances made to farmers by Parliament
for purposes of relieving distress from time to time have been admin-
istered by the Bank;
(5) to promote co-operation among farmers.
The bank’s relation to the co-operation societies, is that of a lending
agency. Legally the Bank is not responsible for the formation of these societies.
They are formed under a special Act for the Promotion of Co-operation,
administered by the Department of Agriculture.
These co-operative societies at first were unlimited liability, but, by an Act
passed in 1922, the Bank is authorized to make advances to these societies with
limited liability, to receive money on fixed deposits for the purpose of financing
co-operative societies and to make advances with respect to fencing of boundaries
and public roads.
Prior to 1921, the Bank was authorized to charge only 5 per cent interest;
since 1921, 6 per cent interest has been charged on all loans.
It will thus be seen that this Bank serves the purpose of the Long Term
Credit and Short Term Credit organizations in other countries, that is, it makes
capital loans on first mortgages to farmers, and, in addition, makes short term
loans for seasonal purposes through the co-operative societies organized within
the Union.
Since its inception in 1912, the Bank has shown a net profit of £355,596,
being 5.14 per cent on the capital invested.
“ While the bank is conducted on ordinary commercial lines, its object is not
to make large profits and the law provides that as soon as the reserve fund and
the capital of the bank total such an amount as is in the board’s opinion adequate
BANKING AND COMMERCE Ixxiii
APPENDIX No. 1
to enable the bank to fully carry out its objects, an amount determined by the
board will be paid to the Minister of Finance out of the profits and the reserve
fund of the bank, but the amount of the reserve fund may not be reduced below
£350,000... It is anticipated that the time is not far distant when the bank
will be fully able to carry out its objects on its own resources and that it will be
in a position to commence the repayment of its capital.”
On the 31st of December, 1922, the co-operative societies owed the Bank
£750,565, while the turnover of the co-operative societies for the same year was
£1,237,400.
The amount of loans on mortgages on 31st December, 1922, was £5,858,824.
These figures will suffice to show the relation between Short Term Credit to co-
operative societies and that of Long Term Credit on mortgages.
It will thus be seen that under the South African plan, agriculture is called
upon to carry itself financially, the government borrowing the money, thus giving
security to the lenders and making possible reasonable interest rate, while the
business of the bank is supposed to be conducted so as to secure a business-like
return to the State.
The Dominion of New Zealand
The effort to promote agricultural settlement through government support
began in New Zealand many years ago and has been worked out with greater
detail with respect to the classification of land and the kind of security offered
for loans than in any other part of the British Empire.
Under the authority of an Act passed in 1892, the government began the
purchase of lands in order to make provision for their sale or lease to private
individuals. In 1894, an Act was passed, known as “The Advances to Settlers
Act,” the first of a considerable number of enactments having for their object
the lending of money to settlers and workers for the purchase and improvement
of farms and for the general development of the resources of the Dominion.
Two general ideas lie behind all these schemes :—
(1) The providing of money on security direct to settlers, and
(2) The providing of money by the government itself in the survey and
improvement of purchased lands with the intention of recouping them-
selves from the sale of the land.
Under the Advances to Settlers Act of 1894, an Advances to Settlers Office
was established and authority was taken to raise £3,000,000 within two years
tor the purposes of the Act.
A number of other Acts were passed prior to 1913 relating to the subdivision
of the land, all of which were embodied in a new Act passed in 1913, known as
“The State Advances Act.”
This Act is of a general character relating to many things other than
advances to agriculture, making provision for advances to settlers, for advances
to workers and for advances to local authorities. In this report, except inci-
dentally, only the agricultural phases of the Act are dealt with.
Advances to Settlers
With regard to advances to settlers, the Act authorizes the establishment of
an Office, called the State Advances Office, managed by an officer called the
Superintendent, who in his own right becomes a corporation. He holds office at
the pleasure of the government.
Under this Act, the Advances to Settlers Branch is authorized to make
first mortgages on lands in New Zealand when free from all encumbrances, liens
and interest, other than leasehold interest. The Act defines freehold land
Ixxiv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
as land registered under the Registration Act of 1908 and describes a great many
other types of land, which, under special forms of lease, are also eligible as
security for loans.
Advances are made between the limits of £25 and £2,000, but loans not
exceeding £500 are given priority. In the case of freehold lands, loans are
granted to three-fifths of the value of the security, or two-thirds, if the land be
first class agricultural land. In the case of lands where the security is lease-
hold, loans are granted to three-fifths of the value of the lessee’s interest.
Loans are made at the rate of 5 per cent interest per annum, and are
repayable in 364 years on the amortization principle. The borrower is permitted,
however, to repay from time to time part of the principal in amounts not less
than five pounds or a multiple of five pounds.
In order to encourage early payment, one-tenth of the interest is rebated,
if the mortgagor, not being in arrears for previous instalments, pays his interest
on or before the date due.
Funds for Loans
ae 18 of the Act sets out the process by which money for the purpose
is raised:
(1) For the purpose of the Advances Office, the Minister of Finance, on
being authorized by the Governor in Council so to do, may from time
to time raise on the security of and charge upon the public revenue of
New Zealand, such sums of money as he deems fit, not exceeding in
any one financial year the amounts hereinafter specified.
(2) The maximum amount that may be raised in any one financial year
for the business of the several branches of the Advances Office shall be
as follows:
For the Advances to Settlers Branch .. .. £1,500,000
For the Advances to Workers Branch.. .. £ 750,000
For the Advances to Local Authorities .. £1,000,000
(3) The sum so raised shali bear interest at such rate, not exceeding five
per cent per annum, as the Minister prescribes.
Since the inception of the scheme in 1894, loans have been advanced to
53,228 people amounting to £19,826,000, of which £12,155,812 has been repaid,
leaving outstanding £7,670,188. These figures are as at December 31, 1921. Of
the loans outstanding at the above date, 14,166 are for sums not exceeding £500.
Of the amount outstanding approximately £4,500,000 is on rural land, the
balance being on urban or suburban land.
It may be of interest to note that under the Advances to Workers Branch
(and a “worker” is defined as a person whose income does not exceed £200),
there has been loaned out £4,446,685, and under the Advances to Local Authorities
Branch, there has been loaned out £4,661 ,000.
In addition to the money raised as described above, the Act authorizes the
lending to settlers of the amount paid in to the Public Debt Sinking Fund and
the amount also paid in to the Advances Office Sinking Fund.
Sir George Elliott, Chairman of the Board of Directors of the Bank of
New Zealand, the government bank, recently stated that the total mortgage
indebtedness of New Zealand was not less than £200,000,000. Of this amount
approximately £7,000,000 is outstanding under the State Advance Act, which
after all, is a very moderate amount in comparison with the whole. He states
that of the £200,000,000 loaned on mortgage, by far the largest proportion has
been obtained from sources within the Dominion of New Zealand and represents
money in the possession of persons of moderate means.
As a large proportion of the loans under the Advances to Settlers Act is in
amounts not exceeding £500, it would appear that advantage has been taken of
BANKING AND COMMERCE Ixxv
APPENDIX No. 1
this Act by a considerable number of persons of moderate means, who, at the
time of taking the loans, were in the process of establishing themselves.
A Moratorium Act has been in force in New Zealand with respect to
repayment of the principal of mortgage loans for nine years and will expire on
31st December, 1924.
During the war period, the same conditions with respect to the prices of
land which existed in England and the United States, and, to a limited extent,
in Canada, existed in New Zealand, giving rise to after war hardships which
made the moratorium necessary.
Short Term Loans
The Bank of New Zealand, which is a bank conducted by a Board for the
State also does a very large business with the farmers. £10,000,000 of the
outstanding obligations as at March 31, 1922, were advances on short term loans
made to farmers. A very large proportion of the loans were under £100, and,
therefore, were probably made to farmers of moderate means.
During the session of the Parliament of New Zealand of 1922, an Act pro-
viding for the incorporation of local associations of the usual co-operative char-
acter was passed. The objects to which loans under these organizations could
be applied were as follows:—
(a) Clearing, fencing, drainage and improvement of a piece of ground
occupied by the member;
(b) Construction of buildings on these grounds;
(c) Purchase of tools, livestock, seed, plants, trees and other things useful
for the occupation or exploitation of land;
(d) Purchase of professional implements;
(e) Payment of mortgages, debts, and other obligations of the member;
(f) All the other objects which the Governor General in Council may declare
as approved in the sense and for the purposes of the present law.
No associations had been formed under this Act up to 31st July, 1923.
Tn all the British Dominions, agriculture has left very heavily the after
effects of the war and special consideration has been granted it. Reports would
indicate that the institutions described above and designed to aid agriculture are
functioning as satisfactorily as could be expected.
Ixxvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
SECTION IV
RURAL CREDIT IN THE UNITED STATES
(1) Long Term or Mortgage Credit
The agitation for rural credit in the United States began many years ago.
During periods of prosperity it would lie dormant but would spring into life again
during periods of depression. The whole movement which led to the establish-
ment of the small state banks with authority to do mortgage business was a
result of the conviction that the large national banks under federal regulations
were so commercial and industrial in their spirit and organization that the state
system of small banks was necessary to agriculture. It was an effort to solve
the problem of mortgage credit from within the state. The fact is that almost
without being recognized agriculture had become so enormous in its industrial
and commercial relations that old methods of financing its operations were felt
to be inadequate without the real reason becoming quite apparent. This state
of affairs was brought about by the permanent settlement of the enormous areas of
good agricultural land and the disappearance of cheap new lands capable of easy
settlement; the consequent rise in value of the lands in the settled area and the
jdifficulty of securing, without being possessed of considerable capital, good
farms; the better education of the farming population and the consquent applica-
tion of modern science to agriculture.
With regard to available lands it may be noted that by 1915, six-sevenths
of all the free land of the United States had been taken up and what remained
was mostly desert, dry or swampy land which could not be brought under cul-
tivation without great capital expenditure. This was brought about by the
passage of the Homestead Act of 1862. Long before 1900 therefore land in the
settled areas had so advanced in price that the difficulty of obtaining good land
by those who desired to cultivate it became very great and larger capital expen-
ditures were necessary. This fact is indicated by the enormous increase in the
price of land as shown by the United States census and by the rapid increase in
the number of tenant farmers. Land which had been bought originally for $1.25
an acre was worth in 1915 from 150 to $250 per acre. The average price of plow
land in the United States in 1919 was estimated by the United States Bureau of
Crop Estimates as $74.31 per acre, while since 1900 the average value of the
farms in the country had increased approximately 400%.
Parallel with this rise of values and as a consequence of it was a great
increase in the number of tenant farmers. In 1880, 25.6% of the farmers of the
United States were tenants; in 1920 this had increased to 38%. The high prices
meant either becoming a tenant or removing to the centres of industry.
During the same period and prior to the establishment of the Farm Loan
Board in 1916, theer had been an enormous growth of farm mortgage business
through the agencies established under state and federal laws for the purpose.
In 1913, the estimated total value of farm mortgages in the United States was
$3,599,000,000. In the seven years following, this had increased to the enormous
total of over $8,000,000,000, the figure at which it now stands approximately.
The agencies granting these mortgages were the Farm Mortgage Banks, Farm
Loan Companies, Insurance Companies, local investors, private lenders and
State Banks and Savings Banks.
BANKING AND COMMERCE Ixxvii
APPENDIX No. 1
Farm Mortgage Banks
The Farm Mortgage Banks were really the pioneer institutions. They came
into being after the Civil War following the development of the western states,
because of the necessity for an intermediary between the eastern capitalists
seeking investments and the western farmer. Men living in the new centres of
populations, familiar with the country and confident of its future loaned their
small capital to farmers on first mortgages and then sold the mortgages to
the men of means in the East who possessed larger means and who desired
good investments. From such a small beginning larger farm mortgage banks
came into being, the bank taking the place of the intermediary instead of the
individuals. In 1921, Farm Mortgage Banks and Farm Loan Companies organ-
ized on the same principles had over $3,000,000,000 of mortgages. These institu-
tions put their own money into the loan, sell it either directly or by means of
bonds to the capitalist, collect the interest and principal and in general act as
agents for the secondary investor, while carrying the responsibility for the trans-
action in case of failure on the part of the borrower.
Insurance Companies
Next in importance came the Insurance Companies. These had invested
in farm mortgages in 1921, $1,250,000,000. Many’ of these mortgages were
purchased from the Farm Mortgage Banks. As théik aim is security as well
as profit, they will doubtless be heavy buyers of thé! ‘honds of the Farm Loan
aed A number of these companies are now making‘loans on the amortization
plan.
National Banks
Prior to 1913 the National Banks were not permitted to lend on the
security of land. They were primarily commercial institutions and required
liquid assets. Many of these, however, acted as agents doing the work of a Farm
Mortgage Company for private persons and insurance companies. Since 1913
National Banks, when not situated in a Federal Reserve City, may make loans
on farm lands under certain definite restrictions. For example, such a loan can
only be a first mortgage on improved property and the total loans at any time
must not exceed one-fourth of the capital and surplus of the banks.
State Banks
Since 1890 a very large part in mortgage credit business has been played
by the State Banks. Of these there are now nearly 20,000 in the United States.
As previously stated they grew rapidly after the free lands had been settled
and the demand for rural credits became somewhat insistent. They depend
mainly on the farming community for their business and are planned to meet
its needs. Many of them prefer the State charter to the National charter for
the reason that the former carries with it more privileges in the direction of the
mortgage business. It is estimated that the mortgages held by the State Banks
amounted in 1915 to at least $1,000,000,000. They are, however, definitely
restricted by the fact that most of them have small capital and are provincial
in their character and outlook.
Trust Companies and Other Organizations
In addition to the foregoing a considerable amount of farm mortgage
business is done by Trust Companies, Building and Loan Associations and a
great variety of saving banks operating under state laws. Probably one-
third of the total mortgage business is done through these agencies.
With all these agencies at work it would seem that all legitimate claims
for money on farm mortgage security would be met.
Ixxviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
That such was not the case was due to following causes:—
(1) The high average of interest rates which prevailed, when compared
with the European farmers with whom the American farmer must compete
especially in the newer settled parts of the country, the parts least able to pay.
(2) The excessive costs connected with the making of loans, namely legal
costs, commissions, and incidental expenses.
(3) The impossibility of meeting mortgage payments out of production of
the land because of the short terms for which the mortgage was made. This
is emphasized when the increased cost of the instruments and methods of pro-
duction are considered.
(4) The knowledge that in other countries schemes of a national character
had been found to work well both in the national interest and the interest of
the farmer.
Interest Rates
With regard to the interest rates, the facts are that the average rate of
interest on first mortgage loans in thirty states of the Union was 745 per
cent in 1915.1. To this must be added legal expenses, commissions and other
charges. In the different states the averages were as follows: Alabama, 8-8
per cent; Arkansas, 8-8 per cent; Arizona, 10 per cent; Illinois, 5-5 per cent;
Indiana, 5-6 per cent; Iowa, 5:6 per cent; Massachusetts, 5-5 per cent; Min-
nesota, 6:2 per cent; Montana, 9-3 per cent; Ohio, 5-7 per cent; Oklahoma,
7-2 per cent; Pennsylvania, 5:3 per cent; Texas, 8-5 per cent; Utah, 8-7 per
cent; Wisconsin, 5-6 per cent; Wyoming, 9-2 per cent. In comparison the
average in Europe does not exceed 5 per cent.
Not only was there a variation between the states but just as great a varia-
tion within the individual states. In Minnesota, an extreme case, it varied from
5 per cent in the south to 9 or 10 per cent in the north. Without question these
variations represented to a certain extent variations in the quality of the security.
Soil and climatic conditions, the type of farming, the distance from markets,
also played a part, but it was firmly believed that the public were being ex-
ploited by the money-lender especially in the new districts where there was
not much competition. It was recognized that this could not be corrected by the
small banks whose facilities for getting money were limited and by whom a
rediscounting was absolutely necessary if considerable business was to be done.
With regard to (2), excessive costs in obtaining money, it is only necessary
to say that for short term mortgage loans, two to five years, a commission of 5
per cent or over was often charged; this added to the interest rate one or two per
cent. When it is added that two-fifths of the total mortgage debt is in the west
north central states where the average rate is high, it seems reasonable to assume
that the average interest charges of the thirty states were not far from 84 per
cent interest, with legal charges still remaining to be accounted for, while in many
of the states it greatly exceeded that sum.
With regard to (3), the impossibility of meeting mortgage payments under
the short term conditions of payment, especially by those whose original capital
was small, was everywhere apparent. It is hardly necessary to repeat that mort-
gage payments on land at $50 to $75 per acre are an entirely different thing from
such payments at $10 per acre. In the latter case payments from production
might be possible; in the former it would be impossible unless the mortgage was
on a small percentage of the value. New methods had to be devised.
To this was added (4) the knowledge, that schemes less oppressive to the
borrower, of greater security to the lender and at lower rates of interest were
working well elsewhere, and this created the demand for careful consideration of
the whole subject.
1 Investigations made by the Rural Organization Service of the United States Government.
BANKING AND COMMERCE Ixxix
APPENDIX No. 1
A distinguished authority on agriculture, the Assistant Secretary of Agri-
culture in 1915 stated the matter to a body of bankers in the following terms:
“T believe I am not overstating the matter when I say that a satisfactory system
of Rural Credit is as necessary to the development of agriculture in the country
as is a widespread application of scientific methods to agriculture. As a matter
of fact, it is impossible for the farmers to make use of the latest scientific dis-
coveries without better credit facilities.” It is hardly necessary to state that the
two go hand in hand.
In 1913, two commissions were sent to Europe from the United States to
study and report on European methods. These were the “United States Commis-
sion” and the “American Commission on Rural Credits.” The former was
appointed by the United States Congress, the latter was assembled by the
Southern Commercial Congress, an organization in the southern states interested
especially in the industrial, commercial and agricultural development of the
southern states. The reports of these commissions were published by the United
States Senate and became the basis of future legislation. If I were to select one
fact as impressing the American mind more profoundly than any other as the
result of the studies in Europe of these commissions, I would say it was the fact
of farm mortgage bonds or debentures coupled with amortization.
One observer, a member of Congress, stated this conviction thus “One of the
most important discoveries in the world was the invention of the farm mortgage
bond or debenture as an instrument to promote land credit. There never has been
a successful system of land credit established in any country that does not use
the mortgage bond or debenture as an instrument of credit to mobilize and
liquefy land values. Through the mortgage bond the farm mortgage has been
made easily negotiable and put in such a form that the holder may realize
thereon immediately.”
The result of all this agitation was the passing of a number of acts for the
purpose of promoting Rural Credit. Of these, one was especially designed to
promote Long Term Mortgage Credit, viz:—
THE FEDERAL FARM LOAN ACT
The Federal Farm Loan Act was approved by the President of the United
States on July 17th, 1916. It is described in the Act itself as an-act “to provide
capital for agricultural development, to create a standard form of investment
based on farm mortgages, to equalize rates of interest upon farm loans, to
furnish a market for United States bonds, to create government depositories
and financial agents for the United States, and for other purposes.”
Under this Act, there is established at the seat of government in the De-
partment of the Treasury, a Federal Farm Loan Bureau, under the super-
vision of a
FEDERAL FARM LOAN BOARD
This Federal Farm Loan Board consists of seven members including the
Secretary of the Treasury, who is Chairman, ex-officio. The remaining six
members are appointed by the President of the United States, by and with the
consent of the Senate. Of the six, not more than three are to be members of
one political party and all must be citizens of the United States. They all
devote their entire time to the work of the Board and are paid $10,000 per
annum for their services. The term of office is eight years and members
are only removable for cause; they cannot be connected with any mortgage or
bonding business and must certify to this under oath before appointment.
Ixxx SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
FEDERAL LAND BANKS
Under the Act, the Federal Farm Loan Board is instructed to divide the
United States, into twelve districts, to be known as Federal Land Bank dis-.
tricts, the districts to be apportioned with regard to the farm loan needs of the
country.
In each of these districts, they are authorized to establish a Federal Land
Bank “with its principal office, located in such city within a district as the
Board shall designate.” The name of the city in which the bank is located is
included in the name of the bank. These banks are now located in the cities of
Springfield, Mass., serving Maine, New Hampshire, Vermont, Massachusetts
and New York; Baltimore, Md., serving Pennsylvania, Maryland, Delaware,
Virginia, and West Virginia; Columbia, S. C., serving North Carolina, South
Carolina, Georgia and Florida; Louisville, Ky., serving Kentucky, Indiana,
Ohio and Tennessee; New Orleans, serving Louisiana, Mississippi and Alabama;
St. Louis, Mo., serving Illinois, Missouri and Arkansas; St. Paul, serving Min-
nesota, Wisconsin, Michigan and North Dakota; Omaha, serving South Dakota,
Nebraska, Iowa and Wyoming; Wichita, serving Kansas, Oklahoma, Colorado
and New Mexico; Houston, serving Texas; Berkeley, serving California,
Nevada, Utah and.Arizona; Spokane, serving Montana, Idaho, Oregon and
Washington.
Only one Federal Land Bank is allowed in each district. Each bank is a
separate corporation independent in its organization and management, but is
under the general supervision of the Farm Loan Board. In the case of each
bank there is a directorate composed of seven persons, three of whom are
elected by organizations to be described hereafter, known as National Farm Land
Associations, three are appointed by the Farm Land Board and a Director-at-
large, also selected by the Board from a list of three persons having the great-
est number of votes cast for them by the National Farm Loan Associations.
Capital
When each Federal Land Bank was organized, it was organized with a capi-
tal stock of $750,000, supplied by the Federal Government. Under the Act, this
is automatically increased by five per cent on each loan made. This five per
cent is derived: by the compulsory sale of stock to each member of a local
association who must subscribe, and pay for in cash, five per cent of the amount
he desired to borrow. The capital stock, therefore, of each bank goes up and
down automatically, depending upon the amount of outstanding loans.
NATIONAL FARM LOAN ASSOCIATIONS
In each federal district, National Farm Loan Associations must be organ-
ized by persons desiring to borrow money on farm mortgage security. The per-
sons so desiring must sign articles of association, specifying in general terms the
objects for which the association is formed and the territory in which it desires
to operate (generally a county). These National Farm Loan Associations thus
become incorporated and are the only medium, excepting in very special cases,
through which persons desiring to borrow money from the Federal Land
Bank can do so. These are, in reality, local semi-co-operative associations, associa-
tions of borrowers, who become responsible for initiating all loans in their district.
Only persons desiring to borrow money from a Federal Land Bank can become
members of one of these associations. -
A National Farm Loan Association must consist of ten or more farmers,
whose joint applications for loans are not less than $20,000. Each borrower, as
BANKING AND COMMERCE Ixxxl
APPENDIX No. 1
before stated, must subscribe for stock equivalent to five per cent of the desired
Joan and assume a liability, in case of loss, for an additional five per cent.
In other words, the local associations are double liability corporations. For
example, should a borrower desire to borrow $1,000 he must buy fifty dollars’
worth of stock in the local association and become liable for an additionai fifty
dollars, in case of failure of members of the local association to meet their
obligations. If the farmer has not the money to buy stock, it is deducted from
his borrowings.
The affairs of a local association are administered entirely by officers
appointed by the association itself. Each borrower has a vote for each five
dollar share of stock he holds up to twenty. No one stock holder in the local
association has more than twenty votes, no matter what the amount of stock
he holds.
Loans Through Agents
In addition to making loans through the local associations, the Federal
Farm Loan Act provides that a Federal Land Bank may make loans on farm
lands through agents approved by the Board. Such agent must be a bank, a
trust company, a mortgage company, or a savings institution, chartered by the
state in which it is operating. This privilege may be taken advantage of in
sections of the country where there are not enough farmers desiring loans to
organize a local association. In the case of a loan through a local association it
is endorsed by the association, which becomes liable to the extent of the double
liability clause. In the case of an agent, however, the agent must endorse the
joan and assume full liability for it. In return for this liability, the agent is
allowed a certain percentage per annum on the unpaid capital. This is sup-
posed to give to the agent a security corresponding at least to the double
hability security of the association.
It will, therefore, be seen that under the Federal Farm Loan Act, loans are
not made by the Federal Land Banks directly to individuals, but only to indi-
viduals applying through associations and recommended by them for loans. Every
member of the association making the recommendation becomes responsible to
the extent of ten per cent of his own borrowings for the total indebtedness of
ihe association. The definite aim of the Federal Land Bank is to keep itself
free from direct relationships with the individual and to force the organization,
wherever possible, of the National Farm Loan Associations.
Organization of Farm Loan Association
The following illustration will make the process or organization clear. Let
us assume that a farmer wishes to borrow the sum of $2,000. He must get at
» least nine other persons in the community, the total of the borrowings asked for
being not less than $20,000, to join him in forming an association.
A meeting of the borrowers is then called and each applicant subscribes for
stock to the extent of 5 per cent of the loan he desires. The law requires that
five directors be elected, each member having the privilege of voting, one vote
for each share of stock up to twenty shares. A directors’ meeting must then
be held and a president, vice-president, secretary-treasurer and loan com-
mittee of three members elected, the directors themselves not being members, of
the loan committee. All officers must be members of the association, excepting
the secretary-treasurer, who must be a person selected especially for his suit-
ability for the work, very often a local bank manager. He is the only officer
who receives compensation for his services. When the foregoing has been ~
completed, the group is ready to enter into articles of association. These articles
can be obtained from the Federal Land Bank. The signed articles of association
J—f
Ixxxil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
with the applications for loans are then sent to the Bank, which sends an
appraiser to investigate the security carried with the loans. After this investi-
gation, if everything is satisfactory, the decision of the Bank is forwarded with
a recommendation to the Federal Farm Loan Board, which, although almost
always following the advice of the Federal Land Bank, nevertheless has power to
refuse the charter. When the Board grants the charter, however, it is for-
warded to the association from the Federal Land Bank of its own district.
When the appraisals and applications have been fully approved and the charter
granted, the loans are forwarded to the secretary-treasurer of the local associ-
ation, who distributes the funds according to the applications made. As has
already been stated, membership in the local association is confined to actual
farmers who wish to borrow on a first mortgage basis.
After an association has been formed in a district, should another person
desire to become a borrower under the system, he must make application through
the Secretary-Treasurer of the local association and be accepted by a two-thirds
vote of the board of directors. By purchasing the amount of stock representing
5 per cent of the desired loan, he becomes a member of the association and his
application is forwarded with recommendation to the Federal Land Bank of his
district. An appraiser of the Farm Loan Board is then sent to pass judgment
on the loan. This appraisal is submitted to the Federal Land Bank and com-
pared with the appraisal of the local committee. It is then sent to the Farm
Loan Board for approval before the loan is made. If the money is granted,
the money will be forwarded to the individual from the Bank through the
secretary-treasurer of the association of which he has become a member.
Non-resident landowners, landlords, land speculators, or other persons who
are not bona fide farmers, are not admitted to membership in these associations,
and therefore cannot borrow from these banks.
Dividends on Stock
The money paid in for stock is deposited with the Federal Land Bank as
additional security for the loans, but dividends are paid upon this stock through
the secretary of the association, generally at a rate equivalent to the rate of
interest paid for mortgages. The association has the right to allocate a part of
this for the expenses of the association. It is a custom in many of the
associations to use these dividends entirely for local expenses.
Amount of Loan and Interest Rate
The maximum amount which a farmer may borrow on his farm is 50 per
cent of its appraised value for agricultural purposes plus 20 per cent of the
permanent insured improvements.
The interest charges of all loans are fixed by law at a maximum of 6 per
cent, not, however, to exceed the interest charges paid on mortgage bonds sold by
more than one per cent. For example, if the last sale of mortgage bonds was
made at 4% per cent then the interest charges could not exceed 54 per cent.
This prohibits the sale of bonds at a rate par of greater than 5 per cent.
Terms of Repayment—Amortization
All loans are repaid on an amortization basis, the borrower having the
right to select the number of years for repayment, provided it is not less than
five nor more than forty. The working of the amortization plan can, perhaps,
be made more clear by taking an illustration. A borrower has $1,000 at 54
per cent to be repaid in half-yearly payments in 344 years. To do this requires
an amortization rate of one per cent in addition to the ordinary interest charges.
Assuming the interest charges to be 54 per cent then the charge, including
amortization, would be 63 per cent. Under the plan, 64 per cent of the original
BANKING AND COMMERCE Ixxxil
APPENDIX No. 1
loan of $1,000 viz., $32.50, would be collected every six months. The difference
between the interest requirement of 55 per cent. on the sum due at any given
time and the 64 per cent. on the total borrowing would be credited as an
instalment on the principal. The following table will show how it would work
out in this particular case:
Principal, $1,000. Rate, 5} per cent. Semi-annual Instalments, $32.50. Final Instalment, $32.42.
Amortization Table Amortization Table
No. Interest Principal Balance No. Interest Principal Balance
3° ets. $0. icts! $ ets. S08 cts! $ cts. Si-eectst
27 50 5 00 995 00 19 92 12 58 711 92
27 36 5 14 989 86 19 58 12 92 699 00
2G 22) 5 28 984 58 19 22 13 28 685 72
27 08 5 42 979 16 18 86 13 64 672 08
26 93 5) 57 973 59 18 48 14 02 658 06
26 77 73 967 86 18 10 14 40 643 66
26 62 5 88 961 98 1 70 14 80 628 86
26 45 6 05 955 93 17 29 1572 613 65
26 29 6 21 949 72 16 88 15 62 598 03
26 12 6 38 943 34 16 44 16 06 581 97
25 94 6 56 936 78 16 01 16 49 565 48
25 76 6 74 930 04 15 55 16 95 548 53
25 58 6 92 923 12 15 08 17 42 531 11
25 38 (eel. 916 00 14 61 17 89 513 22
25 19 7 ou 908 69 14 11 18 39 494 83
24 99 Be 901 18 13 61 18 89 475 94
24 78 ee 893 46 13 09 19 41 456 53
24 57 7 93 885 53 12 56 19 94 436 59
24 35 8 15 877 38 12 01 20 49 416 10
24 13 8 37 869 OL 11 44 21 06 395 04
23 90 8 60 860 41 10 86 21 64 373 40
23 66 8 84 851 57 10 27 22; 23 Bol ag
23 42 9 08 842 49 9 66 22 84 328 33
Ped AM) 9 33 833 16 9 03 23 47 304 86
22 91 9 59 823 57 8 38 24 12 280 74
22 65 9 85 813 72 le 24 78 255 96
22 37 10 13 803 59 7 04 25 46 230 50
22 10 10 40 793 19 6 34 26 16 204 34
28h 10 69 782 50 5 62 26 88 177 46
2152 10 98 M11 52, 4 88 27 62 149 84
2122 11 28 760 24 412 28 38 121 46
20 91 11 59 748 65 3 34 29 16 92 30
20 59 11 91 736 74 2 54 29 96 62 34
20 26 12 24 724 50 Theggl 30 79 ol 55
0 87 Bl Sy he oP hy piece
The form of note taken in this case by the bank is as follows, and it is
held along with a mortgage registered against the property of the borrower:—
Hoan Now. 20 OO i Oe
$1,000.00
For value received...... promise to pay to the order of Tue Feprran Lanp Bank oF
Saint Pau. at its office in the city of St. Paul, Minnesota, the sum of
OnE THOUSAND DOLLARS
with interest at the rate of five and one-half per cent per annum, payable semi-annually
in manner and form as follows:
In sixty-eight semi-annual instalments of
TuHirTY-T'wo DoLuarRs AND Firry CENTS
each, payable on the............ aveots oe eis eee. oc. of and) toh e in each year, and
a final instalment of
1—63
Ixxxiv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Trirty-Two Douuars aNnp Forry-Two Cents
Mayalewous the she Ahn ol) Gay yore AT aa 19.... unless this note shall be sooner
matured by extra payments on account of principal, such method of payment being on
the amortization plan and in accordance with the amortization tables printed on the back
hereof which are hereby accepted and made a part of this note. Extra payments can only
be made on the regular instalment due dates. This note is secured by real estate mortgage
of even date herewith.
If default is made in the payment of an instalment or instalments as herein provided,
the same shall bear simple interest from the date of such default at the rate of eight per
cent per annum, as provided by the Federal Farm Loan Act.
Tf default be made in the payment of any instalment or instalments of this note, or
if default be made in respect to any condition or covenant contained in the mortgage which
secures the payment hereof, then the entire principal of this note remaining at that time
unpaid, together with the accrued interest shall, at the option of the holder hereof, become
immediately due and payable.
Under the Farm Loan Act, however, the borrower has the right after five
years to repay at any interest payment date such additional instalments of the
principal as he may desire.
Section 9 of subsection 12 cf the Act, which reads as follows, defines the
position of the borrower in relation to defaulted payments and other legal
charges :—
“Every borrower shall pay simple interest on defaulted payments
at the rate of eight per centum per annum, and by express covenant in his
mortgage deed shall undertake to pay when due all taxes, liens, judgments,
or assessments, which may be lawfully assessed against the land mort-
gaged. Taxes, liens, judgments or assessments not paid when due, and
paid by the mortgagee, shall become a part of the mortgage debt and
shall bear simple interest at the rate of eight per centum per annum.
Every borrower shall undertake to keep insured to the satisfaction of the
Federal Farm Loan Board all buildings the value of which was a factor
in determining the amount of the loan. Insurance shall be made payable
to the mortgagee as its interest may appear at time of loss, and, at the
option of the mortgagor and subject to general regulations of the Federal
Farm Loan Board, sums so received may be used to pay for reconstruction
of the buildings destroyed.”
Type of Security
Loans are made only on first mortgages on farm lands and the purposes
to which the proceeds of the loan may be put are defined in the Act, as fol-
lows:—
“To provide for the purchase of land for agricultural uses.
“To provide. for the purchase of equipment, fertilizers, and live
stock necessary for the proper and reasonable operation of the mortgaged
farm. The term “equipment” to be defined by the Federal Farm Loan
Board.
“To provide buildings and for the improvement of farm lands, the
term “improvement” to be defined by the Federal Farm Loan Board.
“To liquidate indebtedness of the owner of the land mortgaged,
existing at the time of the organization of the first local farm loan
association established in or for the county in which the land mortgaged
is situated, or indebtedness subsequently incurred for purposes mentioned
in this section.”
The term ‘“‘equipment” has been defined by the Farm Loan Board to include
“the implements needed in the conduct of a farm to facilitate its operations. It
may consist of teams, as well as machinery, tools and like articles.
BANKING AND COMMERCE Ixxxv
APPENDIX No. 1
The term “improvements” has been defined by the Federal Farm Loan
Board as including “anything in the form of a beneficial structure, or any use-
ful, permanent physical change tending to increase productive value, such as
clearing, tilling, draining, fencing, building.”
Loans Limited
In the original Act, the size of the loans was limited, viz., a minimum of
$100 and a maximum of $10,000. In March, 1923, an amendment was passed
to the law permitting a maximum of $25,000.
Legal Charges
Certain charges are permitted by the Farm Loan Board to be collected by
the association from borrowers as follows:
(1) An application fee of $10.00 to cover cost of appraisal and the expenses
of the local association.
(2) The cost of title research.
(3) The preparation of an abstract.
(4) The recording of papers.
These costs will vary somewhat, depending upon the position of the title
of the individual borrower. In the case of clear title, they will be small. Where
there are difficulties to overcome and title to be cleared, the cost would neces-
sarily be higher. On the other hand, there are no renewal costs, no bonuses
and no recording or mortgage taxes.
Reasons for Share Stock of Local Association
It would appear that there were three main objects in having the purchase of
stock made compulsory upon the borrowers:—
(1) To make the local associations more careful in their appraisement. of
lands and in the persons to be recommended for loans, as all the
members are obligated to the extent of ten per cent of their own
borrowing for mistakes made. They would thus be made more anxious
to recommend loans with a reasonable appraisement of lands and to
insist upon payments of interest and amortization charges on the part
of persons who might otherwise be careless.
2. As the sale of farm mortgage bonds was fixed to not exceed twenty times
the capitalization of the bank, the collection of 5 per cent, in cash from
the borrower for capital stock made it possible for each borrower to
capitalize his own loan, so that the capital stock of the bank increases
and decreases just in proportion to the amount of the loans issued.
3. To bring into the association only persons of good standing. Special
enquiry is made concerning a man’s standing in his community and the
personal element enters into decisions regarding loans.
As previously stated the Government originally capitalized each one of
the twelve Banks with a sum of $750,000 making a total of $9,000,000 in all.
This capitalization does not receive dividends. It is really a loan by the Govern-
ment without interest to the Banks. All the additional capital is raised by the
sale of mortgage bonds, the amount issued not to exceed twenty times the
capitalization of the bank. The additional capitalization required in order to
increase the sale of the bonds is provided as stated above by the sale to the
borrowers of stock representing one-twentieth of the amount they borrow.
Tt will thus be seen that the whole organization is essentially an organization of
Ixxxvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
borrowers following the German Landschaft, as distinguished from the French
Crédit Foncier, where the capital of the organization is provided by selling
stock to persons seeking investments. There are no outside capitalists making
dividends by means of profits. Investors are guaranteed the interest on the
bonds by the Federal Land Bank. All other profits, after expenses have been
paid, go into a common fund in the interest of the Bank and to pay dividends
on the stock held by the borrowers. All bonds issued under this system are
exempt from taxation.
Deposits
These Federal Land Banks are not banks in the ordinary sense of the word.
They are not permitted to accept deposits of current funds payable on demand,
excepting from their own stock holders, nor are they permitted to do ordinary
banking business; they are not allowed to loan money on mortgage, excepting
through the Farm Loan Associations or under the special provision for agents
in districts where there are no Farm Loan Associations; they are not permitted
to demand or receive any commission of any kind not specifically authorized
under the Act; they are mortgage corporations limited to acting as intermediaries
between investors wishing to buy bonds and borrowers wishing to secure money
on mortgage. Under the Act, however, the Secretary of the Treasury is
authorized, in his discretion, upon request to the Farm Loan Board, to make de-
posits of federal funds for the temporary use of any Federa] Land Bank out of
unappropriated money in the Treasury. For such deposit the bank must pay
the usual Government deposit rate and must give satisfactory security to the
Treasury. A limit was originally fixed at $6,000,000 as an aggregate for such
deposits.
During the years 1919, 1920, 1921, the United States Treasury, under
authorization of Congress, was permitted to purchase $100,000,000 annually of
the bonds of the Farm Loan Board the reason given being that as the Govern-
ment was seling bonds in enormous quantities for war purposes it preferred to
monopolize the market for the time, and so included the Farm Loan Boards’
demands with its own. Without question it established a rate for the sale of
the bonds.
Sale of Bonds
At first it was arranged that each of the twelve Banks would issue its own
bonds in its own market. At the same time the Farm Loan Board fixed the rate
of interest to be charged at a maximum of 6 per cent, and required uniformity
in rates as far as possible. It was soon seen that these two things were incon-
sistent with one another. Bonds offered for sale, for example, for the Bank
operating in Oregon, could not meet the prices that could be obtained for bonds
offered for sale for the Bank in Baltimore or in Springfield. The same general
motive that causes interest rates to be higher in the West than in the East, as
demanded by mortgage companies, became apparent with respect to the sale
of these bonds, and that, as a common rate of interest was to be charged, it
would be necessary that some common scheme for the sale of bonds should be
arranged. The Act was amended, therefore, unifying the responsibility of the
twelve banks for each other’s issues, and making possible a central agency,
under the authority of the Farm Loan Board, for the purpose of selling all the
bonds issued by the various Banks. The selling agency has been organized.
The head of it is one of the great bond houses of the United States with which
are associated 5 others forming a Syndicate. Under this Syndicate are some
800 smaller bond houses and banks operating through approximately 8,000
selling agents, distributed in all parts of the United States. The Syndicate re-
BANKING AND COMMERCE Ixxxvli
APPENDIX No. 1
ceives 1 per cent for selling the bonds and pays 3 of 1 per cent to the sub-
agencies for the amounts of their sale. There is now no trouble disposing of
all the bonds offered at from 44 to 5 per cent interest rate for par.
JOINT STOCK BANKS
In addition to the Federal Land Banks operating through the local as-
sociations, the Federeal Farm Loan Act provides for the incorporation of Joint
Stock Land Banks for the purpose of carrying on mortgage business through the
issuing of farm loan bonds. These are private corporations, although definite
limitation is placed by the Act upon their activities. These banks may be
organized by ten or more persons forming themselves into a corporation. They
must have a subscribed capital of not less than $250,000, half of which must
be paid in in cash, the balance subject to call by the Board of Directors. Their
charter is issued ‘by the Federal Farm Loan Board on their complying with
these conditions, just as in the case of the Federal Land Banks. They are
not allowed to issue bonds until their entire capital stock is paid up.
Further, they are exempt from certain of the provisions laid down in
respect to the Federal Land Banks; for example, they are freed from the con-
trol of the Farm Loan Board with respect to revisions and alterations of
interest rates from time to time, and with respect to the nature of the mortgage.
’ They are also permitted to make loans for purposes other than the purposes de-
fined for the Federal Land Bank, and may operate outside a fixed district. They
are allowed also to lend larger amounts than the Federal Land Banks, the limit
being $37,500 for Banks with a capitalization of $250,000 and $50,000 for those
with larger capital. On the other hand, instead of being permitted, as in the
case of the Federal Land Banks, to issue bonds aggregating twenty times their
paid-up capital, they are not permitted to issue bonds to exceed fifteen times
their paid-up capital and surplus, nor are they aided by grants directly made
from the Treasury of the United States. It was intended apparently in the
creation of these banks to provide a method of securing farm loans based on
a security slightly different from that which the Federal Land Bank was
authorized to accept and to trust to the initiative of private enterprise to take
risks that could not be permitted under the Federal Farm Loan System. These
profit-making institutions were, therefore, created with rather strictly defined
modes of operating to enable loans to reach persons who could not be reached
by a Federal Land Bank. They may lend to individuals. They function in a
slightly different way from the Federal Land Banks, and on the whole are
charging higher rates of interest, and, in all probability, taking risks which, as
a private enterprise, they feel they can afford to take. They correspond some-
what to the Crédit Foncier.
Growth of Business—Federal Land Banks
Since their inauguration, seven years ago, the business of the Federal
Land Banks has had a very rapid development.
On February 29, 1924, the Assets of the Federal Land Bank aie stood at. $936,694,908 .00
Mortgage Loans had been made valued at.. .. .. .. eas 014. 2383220291400
While the total capital stock was.. .. : eo 4p AM OSA T7200
Of this amount there had been collected from National Farm Loan
Associations.. .. . 2. 642.452.0667. 00
In addition there had been paid back into the United States Treasury of the
original loan of $9,000,000 for capitalizing the twelve Banks... .. .. .. 7,014,000 .00
Dividends had been paid to the National Farm Loan Associations of.. 3 8,828,173.00
And there is a total Reserve and Undivided Profits of.. .. . eae: 7,814,341 .00
During the months of January and February, 1924, loans were made to the
extent of.. P,P eae ane OUUROU
Farm Loan Bonds were outstanding tothe wimountial.:) 9s) cioos=a, Leno, 865,206,665 .00
Ixxxviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The loan was distributed to the various banks of the system as follows:—
Springtield):.024 6.70 al, PRO sb RG AO) eit)... 8 730.967 968: 00
Baltimore. 8% eee Aan TOO Gos a. corre! ocd 858. GOT 00)
(@olumbia. 300 55 ee ee ic Oo a0 eA
Louisville’. 4 23°) gaa ee genie tere 05." 78 981 840,00
New: Orleans .00. Re a Ae Pe: Pak CCAS BONO OO
Sts Louissiay nner paris aod. taae Ba Gp wm (60;238,912300
Stenbahrtiet abs dens ubcemors Medea e wacuter plO4eb4 746.00
(Gate nih ieee AG A RR ep aaa ducer ci a Has anna melt rac led Tlyfiba NU)
Wichita; c.f eno eee eee eee ane a ee GOW CUS FCO
IMfouston ; SOW RAL IOG Ge AVE LE QE eRe 93,516,680 .00
Berkeleyzat i. . eahinsine “ios aoe. 2ok ede. yds6254955.00
Sp ok sta Gis cs yy Mays cea tlic cies ef tes tes Abe ak ue Pi caaeacrcre een MGO ES eae On
Every state in the Union and Porto Rico have received financial assistance
through these banks the amount varying from $254.200 for Deleware to $93,-
516,680 for Texas. Broadly speaking, the Western States and the newer States
on the southwest have benefited most.
Growth of Business—The Joint Stock Land Banks
The Joint Stock Land Banks, under the Federal Farm Loan Board, have
been very keen rivals of the Federal Land Banks as the following figures given
below will show.
Eighty of these Joint Stock Land Banks have organized since the system
began operation.
On; ;Hebruary 29571924; theingassets) stood nates; ls tis: pg wes hee eee he pteooemacn- 00
hey,..had, capitalistock paid im to, Hhe. amo Ol #0. ee Pes eae 34,233,520.00
There were outstanding mortgage loans to the amount of.. .. .. .. .. .. 400,988,343.00
They had Farm Loan Bonds outstanding to the amount of.. .. .. ...... 368,176,900 .00
Combining the figures Federal Land Banks and the Joint Stock Banks they
show the number of loans made from beginning to be 351,183 and the amount of
loans made from beginning, $1,318,843,548.
As the total outstanding farm mortgages indebtedness of the United States
is now approximately $8,000,000,000 it will be seen that the Banks operating
under the Farm Loan Board now hold about 164 per cent of the whole. The
loans under the system will have to increase materially before the 40 per cent
ratio of Germany will be reached. There can be no doubt, however, but that
there has already been a regulatory influence on interest rates.
One further word with regard to the Federal Farm Loan Association.
Approximately 5,000 of these have been organized in the United States and
through these have been issued the major part of the loans under the Federal
Land Banks as distinguishd from the Joint Stock Banks. As _ previously
stated, the object of organizing these local associations was to create a spirit
of co-operation among the farmers and to ensure that the administration of
the whole system should ultimately be in the hands of the borrowers them-
selves and not, as in the Joint Stock Company Banks, in the hands of private
individuals for the purpose of making profit. I found a good deal of difference
of opinion as to the value of these associations, depending, I think, to a con-
siderable extent, upon the temperament of the management of the Land Bank.
For example, one bank president quite openly stated that he did not believe
that the local associations were of any real value, that the persons in them did
not co-operate, that at times it was difficult to get them to meet, in order to pass
upon loans that were urgent, and, on the whole, he would prefer to deal with
the individuals through the other appointed agencies allowed under the Federal
Farm Loan Act. On the other hand, other bank presidents were strongly in
favour of the local association, but I found in such cases they had been spend-
BANKING AND COMMERCE Ixxxix
APPENDIX No. 1
ing a good deal of time trying to bring about a spirit of co-operation among the
borrowers and were convinced that as the days went by these associations would
become a strong conservative influence in maintaining the integrity of the Bank.
In the beginning, there was a disposition on the part of the local association
members to over-value their property, having, doubtless, the feeling that it
was government money they were using and, therefore, were disposed to take
as much as would be allowed. This, I was informed, very rapidly disappeared
when they began to realize that, in case of loss, they would be called upon
under the double liability clause, so that, with the passing of years and a better
understanding, these local associations are becoming helpful, not only in their
own communities, but helpful also in relation to the Bank.
The two things that stand out as having been definitely accomplished by
the Federal Farm Loan system are:—
(1) Equalization of interest, viz., a maximum of six per cent, from the
Atlantic to the Pacific. This was only made possible by the establishment of
mutual responsibility between all twelve banks and the fact that the scheme
being under the supervision of the Federal Farm Loan Board gave confidence
to the investing public.
(2) The second is the firm establishment under this system of the principle
of amortization of farm loans. It seems worth repeating a statement previously
made that the scheme of amortization would not have been valuable in the days
when there was plenty of cheap land and farmers could move easily from one
place to another for purposes of settlement. Under these circumstances, it
might be possible by means of production, in a short period of years, to repay
mortgages raised on land at these cheap valuations, but with the increasing
valuation of land, the increased capital investment necessary for the purchase
of a farm, the old system of short mortgage made the redeeming of a mortgage
impossible out of farm production and the United States farmers found them-
selves in exactly the same position that the farmers of Europe found them-
selves in one hundred years ago. The establishment of this principle without
question will enormously strengthen the position of the American farmer in
competition with Europe.
On the other hand, I think it is wise to point out that the Federal Farm
Loan scheme was conceived as a business scheme intended to be self-supporting
and ultimately free from any lien upon the Government. The result is loans
have only been made where the security was of a class to warrant the loan, and
under very rigid terms. While the advantage of interest rates and of amortiz-
ation were made available to the farmers, there was no slackening in the
demand for a proper security for the money loaned. This, in my judgment, is
the real reason why the Federal Land Banks of the north-western states have
not been able to meet the financial needs of these communities. In parts of
these states, at least, a condition of affairs has been reached with regard to
income from land that makes it impossible for money to be loaned by the
Federal Land Banks or any other bank with the security which the law demands.
I feel confident that the major part of the complaints made, and there are
many, against the operation of the Federal Land Banks, is due to the fact that
they have refused to make loans of money against properties that could not
offer sufficient security. In other words they have refused to become philan-
thropic institutions.
2. Short Term and Intermediate Credit
Before entering into a discussion of the organization of the Federal Inter-
mediate Credit Banks, it seems necessary to look broadly at the way the
problem of Short Term Credits for Agriculture has been faced in the United
States. As stated previously, the agitation for a better scheme of rural credits
a SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
involving both mortgage credit and short term credit began many years ago.
In fact, the whole movement for the establishment and maintenance of small
State Banks had behind it the desire to take advantage of the commercial
opportunities which agriculture offered, and, at the same time, to provide better
facilities for agricultural credit. An illustration of this can be seen in the Bank
Law of the State of Kansas, passed in 1897, which grew out of the agitation
which followed the period of depression from 1891 to 1895. The objects and
methods of the System, as set forth by one of its authors, is as follows:—
(1) To finance the farm efficiently.
(2) To oversee the investment of money in farms so that it would be made
productive.
(3) To supervise the farming operations of the borrower so as to ensure
profitable return.
(4) To compel the majority of the directors of the bank to live at the
place where the bank is located.
(5) To make the capital small so that it could be put in rural communities,
yet having the competition of nearby banks.
It was believed that, with proper local organization and oversight, risks
could be taken on individuals which a large bank, without the local knowledge
could not afford to take. These banks were deposit banks only, and aimed at
using the local capital available in the development of the local community.
That these banks have flourished side by side with national and private banks,
there is no doubt, and their local intimate relation to the local community has
been of immense value. Similar statements could be made with regard to
the other State Banking Systems, at least as operated in most of the Western
States of America.
The whole matter was brought into prominence again during the crisis of
1907 when so many of the small banks of the United States closed their doors.
This was due largely to the absence of a plan by which the banks in the country
could adjust themselves in relation to each other. Corresponding to the agita-
tion which led ultimately to the establishment of the Federal Farm Loan
Board, there was also an agitation for the securing of better facilities through
which capital might flow from one part of the country to another in times of
stress. In 1909 a Monetary Commission was appointed by the United States
which, after a very intensive study of banking methods in other countries, ulti-
mately brought about the system known as “The Federal Reserve System.”
It was felt at that time that the scheme of small banks scattered throughout the
country, of which there were nearly 30,000, was very effective, in so far as they
related to the local community in which they operated. The absence of some
centralizing agency was very severely felt, however, especially in times of de-
pression. A competent authority has stated these difficulties as follows:—
(1) Decentralization.
(2) Inelasticity of credit.
(3) A cumbersome exchange and transfer system.
(4) Defective organization as regards relation to the Federal Treasury.
With regard to the first of these, it will be only necessary to point out that
the 30,000 banks, each with its cash reserve without any exchange relations
other than through the Clearing House, made the flow of capital from one part
of the country to another almost impossible, and, as few of these banks had
any definite relation to the Treasury, even Government help in emergency times
was unavailable.
The Federal Reserve Act which was approved December 28rd, 1913, aimed
at overcoming these difficulties. It provided for the establishment of twelve
Be:
BANKING AND COMMERCE x¢l
APPENDIX No. 1
Federal Reserve Banks, each to operate in one of the twelve Federal Reserve
Districts into which the contry was divided. In determining the boundaries
of these districts, regard was had to the convenience and customary course of
the business of the country. Each district was made large enough to provide
for the operation of a bank with a minimum capital of $4,000,000. Under the
scheme all National banks were required to become members of the System, and
State Banks and Trust Companies, which complied with certain provisions laid
down by the law, were encouraged to join. Member banks were required to
subscribe to the capital stock of the Federal Reserve Bank in their district
to an amount equal to 6 per cent of the member bank’s capital and surplus.
Only a portion of this has yet been called up, but on November 21st, 1923,
the total capital paid into these banks amounted to $110,103,000.
Less than a quarter of the banks of the United States have become mem-
bers of the Federal Reserve System, but this represents approximately 50 per
cent of the total capitalization of the banks of the United States.
Hach of the twelve Federal Reserve Banks is managed by a Board of
Directors elected from the member banks by a special method devised to be
equitable, and are, therefore, democratic in their management.
Above these twelve banks is a central board at Washington known as
“The Federal Reserve Board.” This Board consists of seven members, including
the Secretary of the Treasury, the Comptroller of Currency and five appointed
by the President of the United States with the advice and consent of the Senate.
In addition, there is a Federal Advisory Council consisting of twelve members
appointed by the Board of Directors of the twelve Federal Reserve Banks. The
Federal Reserve Board appoints three of the nine directors of each of the
Federal Reserve Banks, while in turn each Federal Reserve Bank appoints a
member of the Federal Advisory Council, the object being to give complete inter-
communication of ideas within the whole system.
Every bank, or banking association, belonging to the Federal Reserve
System is required to maintain its entire legal reserve in the form of a deposit
in the Federal Reserve Bank of its district. The Federal Reserve Law recognizes
only one from of legal reserve, that is, a member bank’s deposit in its Federal
Reserve Bank. They may keep balances in other banks, but their legal reserve,
the reserve which the Government looks upon as the minimum below which
the public interest demands that banks should not go, must all be kept on deposit
in the Federal Reserve Banks, which thus become the reservoir of the reserve
money of the nation. The great purpose to be served by this is that the reserves
are so mobilized in the centre of great districts that they are available at points
in the country where the demand is greatest for them, the Federal Reserve
Banks being permitted to re-discount for one another and for all the member
banks of the system.
Much discussion has taken place with regard to the relation of the Federal
Reserve to agricultural credit. It is sufficient for our purpose to say that the
Federal Reserve Bank, as the other general institutions described in this report,
does not do business either directly with individual farmers or with individuals
in any other walk of life. The Federal Reserve scheme presupposes that the
farmer or other person borrows through his local bank, which, if they are mem-
bers of the Federal Reserve system, may, in turn, rediscount with the Federal
Reserve Bank, the paper received from customers. The Federal Reserve Act
places certain limitations on the character of the paper to be discounted, but
in reality, as amended in 1919 and 1923, special provision is made for its banks
providing a short term credit for agricultural purpose. For example, any Federal
Reserve Bank may discount “notes, drafts and bills of exchange issued or drawn
for agricultural, industrial or commercial purposes, or the proceeds of which have
been used, or are to be used, for such purposes.”” The law does not permit the
x¢cli SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
reserve banks to discount paper, the proceeds of which are to be loaned to some
other borrower, or to be used for current investment or for speculation.
“Agricultural paper is given by the Act an important advantage over com-
mercial paper, since the latter can be discounted only for a period not exceeding
90 days, while paper which is issued or drawn for an agricultural purpose, or 1S
based on live stock, may now be discounted by Federal Reserve Banks even
though it has nine months to run from the date of discount. The Federal Reserve
Board has made appropriate provision for this in its new regulations in which
the definition of agricultural paper has been clarified and broadened so as to
incorporate the latest. and most liberal principles adopted by the Board in de-
termining what constitutes agricultural paper. Nine months’ paper will thus be
eligible for discount if the proceeds have been or are to be used by a farmer in
any one or more of the steps of planting, cultivating, hasvesting, or marketing
a crop, or of breeding, fattening, or marketing live stock, and the Federal Reserve
Board has held that the marketing of crops or live stock includes carrying them
for a reasonable time in order to market them in an orderly manner instead of
dumping large quantities on the market at one time in order to get money with
which to meet current expenses. Under this provision of the law, member banks
which have loaned money for nine months to wheat growers and other farmers
for the purpose of raising, carrying, and marketing their crops, will be able to
rediscount the farmers’ notes with the Federal Reserve Banks.”
Further, under the Federal Reserve Act, as amended by the Agricultural
Credits Act passed March 4th, 1923, co-operative marketing associations can issue
paper which is eligible for discount with maturities up to nine months, if the
proceeds of the paper are advanced to members of the association for an agri-
cultural purpose, or are used to pay members for agricultural products delivered
to the association, or to finance the association in packing, preparing for market,
or marketing products grown by its members. Co-operative marketing associa-
tions are permitted to borrow money to be loaned to the individual members of
the association under certain restricted conditions. In all cases, credit for agri-
culture is extended to nine months instead of ninety days, the assumption being
that the local bank holds the paper for three months and it is carried by the
Federal Reserve Bank for the additional six months. Further, as amended in
1923, the Federal Reserve Banks are permitted to discount sight or demand drafts
drawn to finance shipment within the country of nonperishable and readily
marketable agricultural products. A limit, however, of ninety days is placed
upon such paper. In order to extend the credit facilities of the Federal Reserve
System to smaller banks under the Agricultural Credits Act of 1923, provision
was made to admit small banks whose capital was 60% of the original require-
ment, provided that within a given time the capital was built up to the necessary
requirement under the Act, and for this purpose such banks were authorized to
set aside 20% of their earned income for the purpose of increasing the capital to
the necessary standard.
The most important provision, however, of the Federal Reserve Act, insofar
as it affected farm loans, was the authorization given to national banks to make
loans for a period up to five years secured by land mortgage. I have referred
to this previously in discussing the question of the national banks. This was
only made possible to the national banks through the Federal Reserve System.
The farmers who need long time loans, therefore, can borrow for five years from
the national banks on the security of their farm lands, and the Federal Reserve
Board has provided in its-regulations that at maturity such loans may be renewed
for an additional five years, although a national bank is not permitted to obligate
itself in advance. I think there can be no doubt that the Federal Reserve System
sought to live up to its responsibilities in connection with short term loans to
BANKING AND COMMERCE xclil
APPENDIX No. 1
farmers. When the prices fell for farm products in 1920, they immediately began
to increase their loans through the members of the system to help steady
agricultural conditions.
For example, it was many months after the great price decline began before
the loans made from the bank in Minneapolis to the northwest farmers reached
its peak. During the period from March to November, 1920, there was more than
$30,000,000 increase in loans made under the system in the country centering
on Minneapolis, and at the end of the period, loans had reached the sum of
$115,000,000. During the same period the Federal Reserve Banks, located in
agricultural districts, increased their loans by more than $500,000, 000 and ee
issues of Federal Reserve notes by a nearly equal amount.
There were two principal causes why the Federal Reserve System did not
satisfy the demands of the agricultural districts.
(1) Because a large percentage of the small state banks which do business
with the farmers did not become members of the Federal Reserve System, and,
therefore, were not able to get the required discounting privilege.
(2) Because the length of time for which the rediscounting privilege was
allowed was too short to satisfy the farmer’s requirements.
The former was the fault of the small banks; the latter, if a fault, the fault
of the law itself and not of the administration.
It was because of these circumstances that the agitation took place which
brought about the foundation of the Federal Intermediate Credit Banks described
on the following pages.
THE FEDERAL INTERMEDIATE CREDIT BANKS
The Intermediate Credit Banks were organized for the purpose of providing
credit for periods longer than granted by ordinary banking operations. They
were intended to cover what was spoken of as the barren area of credit between
the three to six months provided under the Federal Reserve System and the
minimum mortgage term. The Act creating them calls for loans between the
period of six months and three years. The Act was passed in the closing days of
the 67th Congress, March, 1923. As the transactions of the Intermediate Credit
Banks are real banking transactions as distinguished from mortgage transactions,
their operations are merely time extensions of the ordinary banking systems of
the country, but related specifically to the service of agriculture. It would
appear for that reason that they might have functioned more easily under the
Federal Reserve System and the reason for not so doing is not quite apparent.
They are associated, however, with the Federal Land Bank scheme and under
the direction of the Federal Farm Loan Board. Perhaps the chief advantage of
this arrangement is the fact that they will be making banking loans to the same
people who will be taking mortgages under the Federal Land Banks and there
will be some advantage in having the same persons supervising and determining
upon credits to be granted for current account that have already dealt with the
individuals from the point of view of capital loans. From information which I
obtained I concluded that that was the chief advantage of the connection with
the Federal Land Banks and perhaps the further reason that the Federal Reserve
Board wishes to disassociate itself entirely from the operation of loans made for
a longer period than the ordinary term allowed to the Federal Reserve Banks.
Under the Act creating the Intermediate Banks, the Farm Loan Board is
given power to grant charters to twelve institutions to be known as Federal Inter-
mediate Credit Banks. It instructed the Board to establish these institutions in -
the same cities as the twelve Federal Land Banks. The officers and directors of
the Federal Land Banks were made ex-officio officers and directors of the several
XCiv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Federal Intermediate Credit Banks. Such officers were given authority to create
the necessary machinery and employ the necessary officers for conducting the
business of the Bank as a separate organization from the Federal Land Bank.
These Banks were given authority to act as fiscal agents for the United States
Government and to perform such duties as the Secretary of the Treasury may
prescribe. Accordingly, acting under the authority of the charter, twelve separate
institutions were founded in the summer of 1923.
Capital Stock
In order that capital might be provided for the business of these Banks, the
United States Government was authorized to subscribe capital stock to the extent
of $5,000,000 for each bank and the Secretary of the Treasury was given authority
to take up such portion of this stock as might be deemed necessary at any given
time. This gave a possible capitalization of $60,000,000 subscribed by the
Treasury. On the organization of the banks, the Treasury took up one million
dollars capital stock of each of the banks, holding the balance of $4,000,000 in
reserve to be taken as needed.
The Federal Farm Loan Board was authorized to apportion the joint expenses
incurred in behalf of the Federal Land Banks, the Joint Stock Land Banks and
the Federal Intermediate Credit Banks, all under their jurisdiction, among the
three institutions. After all the necessary expenses are paid, it is provided that
the net earnings shall be divided in equal parts, one-half to be paid into the
United States treasury and the balance into the surplus fund until the amount of
such surplus shali be equal to the subscribed capital stock of the bank. After
this has been accomplished, ten per cgnt only of the earnings is paid into this
surplus, the balance being paid to the United States as a franchise tax. The
monies paid from earnings into the United States treasury are to be used at the
discretion of the Secretary of the Treasury, either to supplement the gold reserve
held against outstanding United States notes, or to be applied to the reduction of
the outstanding bonded indebtedness of the United States. Should a bank be
dissolved, its whole assets become the property of the United States.
Debentures
Under the Act, each Federal Intermediate Credit Bank is allowed to issue
debentures up to ten times the original paid up capital and the surplus of the
bank. As the original capitalization of the twelve banks was $60,000,000, when
fully in operation, they could issue debentures for $600,000,000, making a total
available capitalization when the stock is fully paid up of $660,000,000. It is
provided, however, that the issue of debentures shall be subject to the approval
of the Federal Farm Loan Board and no debenture is to be issued for a period
of longer than five years and only as against cash or discounted paper held by
the Bank. The rate of interest on debentures was fixed, at most not exceeding
six per cent.
No Government Liability
It is specially provided that the United States Government shall assume no
liability, direct or indirect, for any debentures or other obligations issued under
the authority of the Act. To make this absolutely clear, provision is made
that all debentures or other obligations shall contain in “ conspicuous and appro-
priate language” a definite statement that there is no liability upon the treasury
of the United States.
Rate of Interest
With regard to the rate of interest charged, definite restrictions are placed
upon it. The maximum rate at which debentures may be issued is fixed at six
BANKING AND COMMERCE XCV
APPENDIX No. 1
per cent, although the Farm Loan Board is given the power to determine
whether it shall be lower than that, while the Bank itself must not charge a
rate of discount of more than one per cent in excess of the late debenture issued.
This fixes a maximum of seven per cent on discounted paper. In discounting
paper for such organizations as shall be described hereafter, the I'ederal Inter-
mediate Credit Bank is not permitted to discount for any borrower who charges
a rate of interest of more than one-half of one per cent above the discount rate
fixed by the Intermediate Credit Bank. The Bank is permitted to purchase in
the open market at par, or below, its own debentures before maturity,
Discounting Privileges
These Banks are allowed a very considerable discretion in the matter of
bank business. For example, they are allowed to discount for or purchase from
any National Bank or any State Bank, trust company, agricultural credit cor-
poration (hereafter described) incorporated live stock loan company, savings
institutions, co-operative bank, co-operative credit or mortgage association of
agricultural producers, organized under the laws of any State, with their en-
dorsement, any note, draft, bill of exchange, etc., or other such obligation, the
proceeds of which have been advanced in the first instance for any agricultural
purpose or for the raising, breeding, fattening or mortgaging of live stock.
They are further authorized to make loans or advances direct to any
co-operative association organized under the laws of any state and composed of
persons engaged in producing, or producing and marketing staple agricu!tural
products or live stock, if the notes or other such obligations representing the
loans are secured by warehouse receipts, or shipping documents, or both, cover-
ing such products, or mortgages on live stock, provided that the loan does not
exceed 75 per cent of the market value of the product. The only restriction
placed upon the amount of such discounted paper which the Federal Inter-
mediate Bank can hold is the limitation (1st) of its own capitalization, and
(2nd) no institution can rediscount for more than twice the amount of its
unimpaired capital and surplus.
Mutual Liability
As in the case of the Federal Land Banks, mutual hability is established
ac between the twelve Banks. Clearly, the purpose of this is to enable the
banks to secure equal credit facilities in the money markets of the country.
This liability is set out in Section 207 of the Act, as follows:—
“That any Federal Intermediate Credit Bank issuing debentures or
other such obligations under this title shall be primarily liable therefor,
and shall also be liable, upon presentation of the coupons for interest
payments due upon any such debentures or obligations issued by any
other Federal Intermediate Credit Bank and remaining unpaid in con-
sequence of the default of the other Federal Intermediate Credit Bank.
Any Federal Intermediate Credit Bank shall likewise be liable for such
portion of the principal of debentures or obligations so issued as are not
paid after the assets of such other Federal Intermediate Credit Bank
have been liquidated and distributed. Such losses, if any, either of
interest or of principal, shall be assessed by the Federal Farm Loan
Board against solvent Federal Intermediate Credit Banks liable there-
for in proportion to the amount of capital stock, surplus, and debentures
or other such obligations which each may have outstanding at the time
of such assessment. Every Federal Intermediate Credit Bank shall, by
appropriate action of its board of directors duly recorded in its minutes,
obligate itself to become liable on debentures and other such obligations
as provided in this section.”
x¢vl SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The tax exemption privilege accorded to debentures issued under the
Federal Land Banks is also granted to the debentures issued under the Federal
Intermediate Credit Banks. This is set forth in Section 210 of the Act, as
follows :—
“That the privileges of tax exemption accorded under Section 26 of
this Act shall apply also to each Federal Intermediate Credit Bank, in-
cluding its capital, reserve or surplus, and the income derived therefrom,
and the debentures issued under this title shall be deemed and he!d to
be instrumentalities of the Government and shall enjoy the same tax
exemptions as are accorded farm loan bonds in said section.”
The scheme of the Federal Intermediate Credit Banks in regard to the
individual borrower is identical with that under the Federal Land Banks, that is
to say, no individual can have direct access for borrowing purposes to the
Bank. All loans made must be rediscounted loans made to a responsible corpora-~
tion which in itself assumes responsibility for the payment of the loan, so
that a borrower must find his way to the Federal Intermediate Credit Bank
through other organized financial machinery. In order to make comprehensive
machinery for this purpose, the Act authorizes the creating of
NATIONAL AGRICULTURAL CREDIT CORPORATIONS
These are organizations corresponding to the local associations under the
Federal Land Bank. These National Agricultural Credit Corporations, how-
ever, are much more highly organized institutions than the local associations
under the Federal Land Banks.
The manner of the formation of these organizations is described in the Act
as follows: “ That corporations for the purpose of providing credit facilities
for the agricultural and live stock industries of the United States, to be known
as National Agricultural Credit Corporation, may be formed by any number of
natural persons, not less in any case than five. Such persons shall ente: into
articles of association which shall specify the object for which the corporation is
formed. Such articles of association shall be signed by the persons intending
to participate in the organization of the corporation and be forwarded to the
Comptroller of the Currency to be filed and preserved in his office.”
The organization certificate and the articles of association must be ack-
nowledged before some judge of a court of record or notary public before
submission to the Comptroller of the Currency for approval. On the approval
of the Comptroller of the Currency, such an association becomes a corporate -
body with well defined powers in relation to financial operations. For example,
they are allowed:—
(1) To make advances upon, to discount, rediscount, or purchase and to
sell or negotiate, with or without its endorsement of guarantee, notes, drafts,
or bills of exchange and to accept drafts or bills of exchange, which (a) are
issued or drawn for an agricultural purpose or the preceeds of which have been
or are to be used for agricultural purposes, (b) having a maturity at the time
of discount, purchase, or acceptance not exceeding nine months, and (ce)
are secured at the time of discount, purchase or acceptance by warehouse
receipts or other like documents, conveying the title to non-perishable and
readily marketable agricultural products, or other instruments of like guarantee.
(2) To make advances upon, or to discount, rediscount, or purchase and
to sell or negotiate with or without its endorsement or guarantee, notes secured
by chattel mortgages, conferring on first lien upon maturing, or breeding live
stock or dairy herds and having a maturity at the time of discount, rediscount,
or purchase not exceeding three years. :
BANKING AND COMMERCE xCVli
APPENDIX No. 1
(3) To subscribe for, acquire, own, buy, sell and otherwise deal in treasury
certificates of indebtedness, bonds or other obligations of the United States
to such extent as its board of directors may determine.
(4) To act when requested by the Secretary of the Treasury as a fiscal
agent of the United States and to perform such services as the Secretary of
the Treasury may require in connection with the issue, sale, redemption or
re-purchase of bonds, notes, treasury certificates or other obligations of the
United States.
There is much additional authority given for conducting ordinary business,
but the most outstanding one is their right, subject to regulation of the Comp-
troller of the Currency, to issue collateral trust notes or debentures with
maturity not exceeding three years and to pledge as security for such notes
or debentures financial paper held by the corporation. It is specially stated,
however, that “the United States Government shall assume no liability direct
or indirect for any debentures or other obligation issued under this title and
all such debentures and other obligations shall contain in conspicuous and
appropriate language to be prescribed in form and substance by the Comp-
troller of the Currency and approved by the Secretary of the Treasury, a clear
indication that no such liability is assumed.”
Capital Stock
The National Agricultural Credit Corporation is not permitted to do busi-
ness until it has paid up capital of $250,000; which must represent at least 50 per
cent of the authorized capital stock of the corporation. The remaining 50
per cent must be paid within six months after the beginning of business. Such
a corporation is allowed to make loans to the extent of ten times its paid up
capital.
Rate of Interest
With regard to interest rates it must submit to the laws of the state in
which the corporation is located. A special penalty is imposed, should at any
time, or by any means, direct or indirect, a rate of interest be charged greater
than that allowed by the State law. If this is knowingly done, the corporation
forfeits the entire interest of the debt and has no power of collection and,
further, the person who was charged the interest, if paid, has the right to recover
in action twice the amount of the interest thus paid to the corporation, provided
legal action is commenced within two years—a very definite and rigid provision.
I think sufficient has been said to show that the National Agricultural
Credit Corporations are intended to occupy a very large place in the financing
of agriculture. While they function through the Federal Intermediate Credit
Banks and constitute an intermediary between the bank and the individual,
they differ entirely from the local associations under the Federal Land Bank in
that they are private corporaticns for profit-making purposes, doing business
for agriculture under certain definite restrictions with regard to interest charges
and security placed upon them by the Treasury of the United States.
Credit Corporations Formed by Banks
There is one special provision to which, perhaps, attention should be called,
viz., that any particular bank of the Federal Reserve System may file application
with the Comptroller of the Currency for permission to invest an amount not
exceeding in the aggregate ten per cent of its capital stock and surplus in the
stock of one or more of the National Agricultural Credit Corporations. As a
matter of fact, while it may have been intended originally that these corporations
should be corporations formed from among the larger producers on the land
1—7
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
xeviil
and local financial men, in many localities the banks have taken the initiative
in their organization, the reason for this probably being that while the banks
themselves are only permitted to rediscount with the Federal Intermediate
Credit Banks up to twice their paid up capital and surplus, these institutions
are permitted to re-discount-up to ten times their paid up capital and sur-
plus. The debentures issued by these corporations are not free from taxation,
but are subject to the laws of the state in which they operate.
There has not yet been time to determine to what extent these institutions
will function as practical institutions. So far as I know the only ones operating
were organized through the agency of the banks for the purpose above mentioned.
The twelve Federal Intermediate Credit Banks were promptly organized
after the passage of the Act, March, 1923. The following figures will show how
far they have functioned as business organizations. The statements are as at
February 29, 1924.
Direct loans and discounts have been made to the amount of.
$41,409,368 .00
This amount was loaned out at the banking centres as follows:—
pimMetteldgy rt. eee a mein, Wena See. GANG, Ream en aw meen hon aatare iy m2 (AO ED
Balin or city vere Mt iy aie ae Pgh rites a ieay i te ae Peery eae 6,511,150.00
(Cohimbial: 44. ass, EMG. Bet see 4,683 355.00
ISO UNS Walle eG ee et i ee ee 2,210,406 .00
New vO rleamsis oy eee eee eee ere 6,164,816.00
St. LOWS ee AL. et ete RAs SRR ee GaSe oP ae 1,176,607 .00
Sin! ae 1 be shethccnesdi Je yplars Wiis ee ah raat Mea late es edh epite ibe seme cite ed 2,659,620. 00
(Oma fea yeh bs ah) CE Thy 3,262,258 .00
Wichita ol .. otoritidaciewasl? Ne shoes Btn. ae: 4,465,676.00
(Hioustonss..42. are drpeeeaed mabhatin Sel debemal ee eee 3,433,177 .00
BERkeley ceca Wee desde ek ok le ue wis 5,061,240.00
Spnokane 1,163,107.00
These banks had outstanding on the same date debentures
AMOUMHING Hos ah Pe Bs | es 17501000 200)
These debentures are short term debentures and are sold generally to banks
for short time investments. The price so far has been good, as the Government
capitalization of $60,000.000 gives them special security. No one can foretell
what would happen should their sale greatly exceed that amount. It is difficult
to say what the future has in store for them, as the lengthening of the Federal
Reserve discount time to nine months may greatly interfere with their develop-
ment.
War Finance Corporation
In the foregoing I have not discussed the operation of the War Finance
Corporation, which, by assisting the small banks, and co-operative organizations
and Live Stock Loan Companies, has co-operated in carrying agriculture for the
past few years. It is not part of the permanent financial system of the country.
It was intended to close its operations on the Ist of February, 1924, but because
of agricultural conditions in the Nerthwestern States, Congress recently extended
its life until 31st December, 1924. The figures in connection with its work
will, however, be of significance as during its existence it has been a very great
assistance in financing agriculture.
From the time authority to make loans to agriculture was granted in August,
1921 to November 20, 1923, advances in the interest of agriculture were made
as follows:
To banking and financial liabilities... .. .. .. ..... $169,708,000
Ma live isvock ode CoOmpanics.: ..) eae 80,096 ,000
To Co-operative Marketing Associations... .. .. .. .. 37,936,000
Maling ial wotalt ofiiyito DV Raar tl HIe@ Aa 287,740,000
Of this;therevhas: been! repaide dance, wrngd ote) st qa2lie4s000
Outstanding.. .. . Ey eee 76,395,000
BANKING AND COMMERCE XCiX
APPENDIX No. 1
Like all the other institutions described, the War Finance Corporation acts
only through organized financial institutions.
The following diagram shows the relation of the various institutions to
the Farm Loan Board and to each other, with the minimum capitalization.
Tracing backward, it also shows the steps through which the application of the
borrower must go to secure final action. It will be seen that except in the case
of the Joint Stock Banks which are private institutions under special regulations,
the farmer only gets access to the lending authority through local organizations.
FARM LOAN BOARD
80 Joint Stock 12 Federal Land Banks 12 Intermediate Credit Banks
Banks (Capital $750, 000 (Capital $5, 000, 000 eac 1)
(Capital $250,000 each) 5% of loans each)
2
Farmer
5,000 National Farm Agents in Small National Trust
Loan Associations Special Banks Agricultural Companies,
Min. loans $20,000 Cases Credit etc.
or capital $1, 000 Associations
(Capital
$250, 000)
Farmer Farmer Farmer Farmer Farmer
aoe
c SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Rural Credits by State Governments
In addition to the provisions made, as set’ forth in the foregoing under the
Federal Government, many of the State governments of the United States have
arranged for mortgage loans, some of these making provisions to raise money by
debentures and others authorizing the State Treasury to make loans from special
funds, generally from the permanent educational funds of the state.
The States of Idaho, Indiana, Iowa, North Dakota, Oklahoma, Oregon,
South Dakota and Utah have made provision in their constitutions for loaning
money to farmers on mortgage credit. Most of these make their loans out of
certain specified funds, generally, however, the permanent educational funds of
the State, or monies derived from the sale of State lands. Considerable sums
of money have been lent out under these various provisions. There are a few,
however, that I think deserve special mention.
The State of Arizona, in 1915, passed a law authorizing loans to be made
in farm mortgages from the moneys secured from the sale of lands owned by the
State.
A State Land Settlement Act was passed in the State of California in 1917,
having for its purpose “ the permitting of closer agricultural settlement, assisting
deserving and qualified persons to acquire small improved farms, providing
homes for farm labourers, increasing opportunities under the Federal Farm Loan
Act and demonstrating the value of adequate capital and organized direction
in subdividing and preparing agricultural land for settlement.”
Perhaps the most conspicuous examples of this sort of effort are to be found
in South Dakota and Minnesota. In South Dakota, the State constitution
provides that permanent school funds may be invested in first mortgages on
farm lands and, under this provision, over six million dollars had been loaned
on mortgages before 1912. In 1917, however, the legislature passed an Act
establishing a system of rural credits for the State, creating the Rural Credits
Board for the purpose of “ maintaining a system of rural credits and providing
for the loaning of money byethe State of South Dakota upon real estate within
this State,” and, in addition, ‘“ authorizing the State of South Dakota to borrow
money on its warrants and bonds secured by the good faith and credit of the
State.”
The purposes for which these loans may be made are almost identical with
the purposes stated in the Act creating the Federal Farm Loan Board. There
is this distinction, however, that loans may be made up to seventy per cent of
the value of the land and forty per cent of the insured value of the improvements
as against fifty per cent and twenty per cent under the Farm Loan Act. Loans
run from five to thirty-five years and are paid on the amortization principle. I
have not been able to get the exact amount of loans under this scheme, but I
was informed that it probably amounts now to $40,000,000. As the interest
charges must be paid by the Government, the State is at the present moment
embarrassed, as a consequence.
_ The State of Minnesota, in 1923, passed an Act creating a rural credit system
“for the loaning of money by the State of Minnesota upon real estate within the
State, authorizing the State of Minnesota to borrow money on its certificates and
bonds secured by the good faith and credit of the State for the purpose of main-
taining such system of Rural Credits.” Here again the provisions regulating the
purposes of loans are almost identical with those of the Federal Farm Loan
Board. They provide for the purchase of equipment and live stock, buildings on
improved farms, liquidating indebtedness on farms, and for part payment of the
purchase price of improved farms, provided always that the property is occupied
by the owner. Loans are limited to sixty cent of the value of the land plus
thirty-three per cent of the value of the improvements and the limits between
BANKING AND COMMERCE cl
APPENDIX No. 1
which loans may be made are $500 and $15,000, The money in this case, as in
South Dakota, is raised directly by the State Treasury and made available to the
board of management for loans. This system has been in operation for less than
a year, but has already loaned out approximately eigth million dollars with a
limit to their borrowings for the time being of forty million dollars. In January,
1924, Minnesota was disposing of its bonds at 44 per cent par and was making an
additional bond issue for this purpose of ten million dollars. Loans were being
made to farmers on an amortization scheme for 354 years at 54 per cent interest
plus amortization charges, + per cent less than the Federal Farm Loan Board.
In reality, this Minnesota system is just duplicating the work of the Farm
Loan Board and was brought about because of the conviction on the part of
some people in the legislature that the Farm Loan Board was not generous enough
in its lending policy and because the machinery through which it was working
was said to create delays in the securing of loans.
The total amount advanced on Farm Mortgages under the various State
systems is at the present moment not far short of $100,000,000.
In concluding this section, I think a word about the general financial con-
dition of agriculture in the United States may be permitted. In spite of all that
has been done to provide credit, great distress still prevails, especially in the
western and north-western states. As none of the larger organizations under
Government auspices are permitted to deal directly with the individual, an effort
is now being made to find a more direct way to help, especially in assisting those
in the grain growing areas, who wish to develop diversified farming. A bill to
grant $50,000,000 for this purpose was recently defeated by the Senate of the
United States. The President has appealed to the Chairman of a new financial
organization known as the Agricultural Credit Corporation, capitalized at
$10,000,000, to undertake the responsibility of individual loans, suggesting that
under proper regulations, the War Finance Corporation would be willing to make
substantial advances for the purpose.
In the meantime, there is a great exodus from the land to the cities, especially
in the above mentioned states. In his report to the President on the matter,
Mr. Henry C. Wallace, Secretary of Agriculture for the United States, stated
that over a million people left the land in 1923. Recently, representatives of a
number of the leading farm organizations in the United States have published
an open letter to “the President, the Congress and the People of the United
States”, in which the statement is made that farmers were forced from their homes
during 1923 at the rate of 100,000 per month and “the process still is under way
in all its cruelty”. “Country conditions’, it is said, ‘‘cannot be told in words.
The hundreds of broken banks are real, but the suffering which followed them
is hidden in the haze of distance. Unceasing toil of millions of people, futile
attempts to protect family and property is lost without recognition. The reason
for all this remains unchecked, although it has existed for five years.
“The cause is evident. A disordered world emerging from war and handi-
capped by man-made barriers across channels of international trade proves
unable to absorb the surplus production of our farms and our industry at prices
commensurate with American standards. An elaborate structure of economic
protection is provided for industry and labour but does not reach the farmer.
“The remedy is as obvious as the cause. It rests in the application of
effective protection of the farm equally with those of other industry. The
establishment of domestic markets for farm crops on an American basis, apart
from world conditions, to conform with like markets already provided for
American manufacture and American labour.”
The remedy proposed is that the United States should shut herself off from
trade contact with the outer world. This would appear to be the remedy of
cil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
despair. In reality, there are two causes, one of which is touched upon in the
foregoing quotation, viz., the disorganized state of the world markets, resulting
from the world war and the inability of Europe to feed herself at the American
cost of production. The second cause, however, is found in the fact that during |
the war, the high prices of products led to the purchase of land under conditions
which made profitable cultivation impossible in normal times. This was further
accentuated by the agricultural development of areas for cereal crops, hitherto
unused and wholly unsuited for the purpose. I would respectfully suggest that
in this there is a lesson for Canada.
BANKING AND COMMERCE cili
APPENDIX No. 1
SECTION V
RURAL CREDIT IN THE DOMINION OF CANADA
The discussion of the problems in connection with rural credit in Canada
is of long standing. Many years ago, in some of the provinces of Canada an
effort was made to meet the requirements of the small town and country
districts by means of a system of small banks. For reasons which it is unneces-
sary to discuss in this report the scheme failed in Canada and our banking
history, as a consequence, runs along a line entirely different from that of our
friends in the United States. Canada followed the European especially the
English tradition of establishing large central banks, operating through branches
established in localities where the establishment of such branches appeared to be
warranted economically. The Canadian banking system went through a period
of ups and downs as did the banks of the United States, having its times of
great success and periods of prosperity and its times of failure in periods of
great depression. In the early days the demand among the farmers for credit
from the banks was not great, but, as the days went by, the same kind of
conditions that produced the increased demand for Agricultural Credit in the
United States increased the demand in Canada and the agitation in favour of a
special system for financing agriculture followed closely the history of the same
movement in the United States.
Up to the present time no general system of Agricultural Credit either for
Long Term or Short Term Credit has been established. Efforts have been made
from time to time to secure legal standing for Co-operative Credit Societies on
the European model, but have so far failed of recognition, as far as the Federal
Parliament is concerned.
On three occasions bills have been presented to Parliament, but did not
secure authorization. These bills were:—
_1. Bill 26, 1909-10. An Act Respecting Co-operative Credit Societies.
2. Bill 11, 1910-11. An Act Respecting Co-operative Credit Societies.
3. Bill 194, 1914.. An Act Respecting Co-operative Credit Societies.
So far, therefore, as the Federal Parliament is concerned, organized Long
Term Credit is a private enterprise in the hands of the mortgage companies and
insurance companies and Short Term Credit in the hands of the banks. No
effort to meet the requirements of what is called Intermedite Credit has been
made, except by the banks.
In most of the provinces of Canada, however, effeorts have been made to
organize all these forms of credit. These efforts are discussed in what follows.
British Columbia
So far as I am aware, the first effort to establish some system of Rural
Credits in Canada was tried out in British Columbia. In 1897-8, a demand
was made in the Province of British Columbia for cheaper money than that
provided by the ordinary banks and loan companies for agricultural purposes
and an Agricultural Credits Act was passed by the British Columbia Govern-
ment in 1898. This Act was based on the agricultural system of Germany.
Its author was Mr. R. E. Gosnell, who was then in the service of the British
Columbia Government. Under this Act, the Government of British Columbia
took power to loan money to associations of farmers of twenty or more members
civ SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
for specific purposes, including fencing, draining, purchase of live stock, farm
implements, etc., to persons, who, having pre-empted land, had worked upon it
long enough to secure their grant from the Crown as well as to other farmers
who had already had their lands under cultivation,
The scheme was an unlimited liability scheme. The money was to be
loaned to an association of borrowers, who, following the practice of the
Raiffiesen system in Germany, were authorized to loan money to members on
the endorsation of two of their number. The Government undertook to loan
to the Association at 34 per cent and to allow the Association to charge its
members 5 per cent, the 14 per cent margin being allowed for expenses and to
create a reserve fund for possible losses. This Act was passed as a result of
a good deal of agitation, but no loans were ever made under it for the simple
reason that the farmers were not prepared to accept the co-operative principle
involved in it.
Later on, two special Acts affecting agriculture were passed and, with
amendments made from time to time, are still in operation in the province.
The first was passed on March 6th, 1915, and is entitled “An Act Respecting
Agriculture and Providing for the Incorporation and Organization of Agricul-
tural Associations and Making Provision for Agricultural Credits”. It is
cited as “ The Agricultural Act, 1915”. The other, passed in May, 1917, is
entitled “An Act to Promote Increased Agricultural Production” and jis cited
as “ The Land Settlement and Development Act’; Both of these acts provide
for Long Term Mortgage Credit and also for Short Term Credit under certain
specified conditions,
Agricultural Act, 1915
Under this Act, there is created an Agricultural Credit Commission, con-
sisting of a superintendent who shall be, ex-officio, a director, and four other
directors, who together constitute a body corporate with the usual powers to
conduct a lending business as described in the Act. The superintendent holds
office for ten years, unless removed as a result of action in the Legislative
Assembly. Two of the directors are appointed for a period of ten years under
the same conditions, but they must be engaged in the occupation of farming;
the other two directors are the Deputy Minister of Finance and the Deputy
Minister of Agriculture.
All regulations made by the commission for the conduct of business, all
fees payable, etc., are subject to confirmation by the Lieutenant Governor in
Council. Provision is made for the usual methods of carrying on the business of
such an organization.
Working Capital
_ The working capital of the Commission is such as is raised from time to
time by the issue of securities and such money as may be appropriated from
time to time by the Legislative Assembly and such money as otherwise becomes
available under repayment and other funds. All securities sold are sold by the
Department of Finance of the Province and are unconditionally guaranteed by
the Province. The Board works in the closet possible association with the
provincial authorities. It, however, is authorized to keep its own accounts and
to make its own banking arrangements subject to the approval of the Govern-
ment. Provision is made in the usual way for sinking funds and reserve funds
to cover accruing securities.
Under the Act, the Commission is authorized to accept as security for loans
first mortgages upon agricultural land in the Province of British Columbia
free from all encumbrances, liens, and other interests, except where special
provision is made to the contrary.
BANKING AND COMMERCE CV
APPENDIX No. 1
The loans are made for the following purposes :—
(a) The acquiring of land for agricultural purposes and the satisfaction
of encumberances on land used for such purposes;
(b) The clearing of land, draining, dyking, water-storage and irrigation
works;
(c) The erection of farm buildings;
(d) The purchase of live stock, machinery and fertilizers;
(e) Discharging liabilities incurred for the improvement and develop-
ment of land used for agricultural purposes and any purpose calculated
to increase land productiveness;
(f) And any purpose which in the opinion of the Commission will increase
the productiveness of the land in respect of which the loan is proposed;
(g) Carrying out the objects of any association, subject to approval by
Order in Council as hereinafter provided;
(h) Taking over in whole or in part and with the approval of the Lieutenant
Governor in Council, by Order in Council, any existing loan by the
Crown in right of the Province of British Columbia to any associa-
tion or any debentures issued by any association.
No loan is granted for an amount exceeding sixty per cent of the appraised
value of the land offered as security for the loan, the value to be calculated on
the basis of productiveness.
Loans are granted only to persons engaged in agricultural pursuits, and all
officers and directors of the company are prohibited from receiving loans.
Loans may be made as long term loans or as short term loans or for a single
season, in every case being covered by the mortgage. The rate of interest is not
fixed, but it must not exceed more than one per cent of the actual interest paid
on the securities upon which the money was raised. Long term loans must be
paid back by amortization in either 364 years, 30 years or 20 years. Short term
loans must not exceed in amount $2,000 to an individual or $10,000 to an
association. Such loans must not be for less than three years or more than ten.
Single season loans may be made secured by promissory note and by a mortgage,
the total amount to a person or dividual being the same as above.
Power is given under the Act for increasing loans on a basis of improved
condition of property or in recognition of instalments already paid.
Rigid provision is made in case of a loan not being applied to the definite
purpose for which the loan was granted. The Commission may by giving one
month’s notice enter upon the property and sell either by private sale or public
auction without recourse to law the property of the borrower.
Up to the end of 1922, loans were granted under the Act amounting to
$1,073,300.00, and there was outstanding $691,250.00 with overdue interest,
amounting to $32,152.53.
Most of the money loaned has been used in refunding accumulated debts.
The Act has not produced satisfactory results.
When the Agricultural Act of 1915 was passed, previous Acts bearing upon
the same subject were repealed.
Land Settlement and Development Act, 1917
The Land Settlement and Development Act was passed in May, 1917, and
amended in 1918, 1919 and 1920. Under this Act, there was created in the
Department of Agriculture or in the Department of Lands, as might be deter-
mined by the Lieutenant Governor in Council, a Land Settlement Board, con-
sisting of one or more members appointed by the Lieutenant Governor in
Council.
CVvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
To this Board, on the authority of the Lieutenant Governor in Council, the
Minister of Finance is authorized to pay from time to time, out of the con-
solidated revenue of the Province, any monies appropriated by or under authority
ef the Legislature for the purposes of the Board. These advances are to bear
interest at a rate fixed by the Lieutenant Governor in Council from time to
time.
All salaries and other expenses incurred by the Board for the administration
of the Act are paid out of the money so advanced.
The Board is authorized to make loans, subject to the regulations of the
Board to any person or association on first mortgage security upon agricultural
land in the province, if it be free from encumbrances other than hens to the
Crown, that is to say:—
(a) Land held in fee simple.
(b) Land held by record of pre-emption under the Land Act.
(c) Land held by certificate of purchase on deferred payment.
Further, the Board is authorized to make loans by security on mortgage
to Associations incorporated under the Act of 1915 of a sum not exceeding 60
per cent of the cash value of the Association’s property.
Under this Act, loans are made for the following purposes:—
(a) For any purpose which in the opinion of the Board will maintain or
increase agricultural or pastoral production;
(6) For carrying out the objects of any association, subject to approval
by Order in Council;
(c) For taking over in whole or in part, subject to approval by Order in
Council, any existing loan advanced by the Crown in right of the pro-
vince to any association or any debentures issued by any association.
Before the granting of a loan, certain definite regulations with regard to
valuing security have to be carried out.
All mortgages under this Act contain the personal covenant of the borrower.
The borrower is also required to keep insured all destructible property.
The rate of interest on these loans is fixed from time to time by the Lieu-
tenant Governor in Council, but must not exceed by more than one-half of
one per cent the actual amount paid by the Government for the money.
Two kinds of loans are made:—
(1) Loans which may run either 25, 20 or 15 years, the annual collections
being sufficient to amortize the loan within the period.
(2) Loans which may run from three to ten years and are described as
short-dated loans.
These loans are limited in amount not to exceed $5,000 to an individual or
$10,000 to an association. They are not amortizable, but are subject to the
conditions created by the Board.
Under this Act, in case of default in making payment, the Board may enter
upon the property for collection without recourse to a court of law.
Under this Act, there was outstanding at the end of 1922, on principal,
$627,615.00, and overdue interest of $34,486.00.
Under both of these Acts, the money borrowed has been used largely in
paying off existing liabilities, generally in favour of mortgage companies.
It is stated by the British Columbia authorities that the most satisfactory
borrowers are those starting on new land with a certain amount of capital,
in which case the loan is made for some specific improvement.
These organizations are apparently not destined to play a very important
part in the farm mortgage business in British Columbia.
BANKING AND COMMERCE evil
APPENDIX No. 1
Quebec
The first successful effort to introduce the principle of the small bank for
rural purposes in Canada was made in the Province of Quebec. The late M.
Alphonse Desjardins, a resident of the town of Lévis, after a careful study of
the systems of small banks in operation in Europe, decided to introduce into
Quebec a system of “People’s Banks”, the “‘Caisses Populaires” after the model
of the ‘People’s Banks” in Italy.
The first bank was organized under the scheme on December 6th, 1900, in
the town of Lévis.
The conditions making possible the success of such a scheme were present
in the Province of Quebec as in no other province in Canada. The social, racial
and religious unity that exists there made it easy for groups of people to
co-operate on a common idea.
These banks were finally organized by law and operate under the Quebec
Syndicates Act passed in 1906 and amended in 1919. Since 1915, they are
obliged to make an annual report on their operations to the Secretary of the
Province and the Bureau of Statistics is obliged to collect and compile reports
for publication in the statistical year-book.
These banks are not strictly rural institutions, that is to say, they admit
to membership persons who are other than farmers, but, in reality, they work
out to be more largely in the interest of farmers than any other class, because
of the high percentage of farmers composing the membership. While they do
not specially aim to do mortgage business, loans are made on first mortgage on
immovable property. In addition, they make loans to their members on per-
sonal security.
Each bank works in a small restricted area, where the personal character
and integrity of the individuals are well known, so that the risk on loans is
exceedingly small. The capital for the individual banks is raised by selling
shares of five dollars each and by receiving deposits, upon which savings bank
interest rates are paid. Both shares and deposits may be withdrawn on de-
mand. The liability of the shareholder of the bank is limited to the value of
his shares in the bank. It was believed by Mr. Desjardins that it would be
impossible to have an unlimited liability scheme in Quebec as in Europe and
that was probably his real reason for selecting the Italian model rather than the
German model for his banks.
Management
Each bank is administered by a board of management composed of at least
five members. There is a committee on credit composed of at least three mem-
bers. This committee examines and approves, or disapproves, the loans re-
quested by shareholders. None but shareholders are allowed to borrow. There
is a board of supervision composed of three members, who are responsible for
checking the value of the securities and checking accounts. No member
of any board is permitted to borrow. They give their services gratuitously.
All officials are obliged to reside in the parish or city where the bank is founded.
The manager may be paid a salary.
Each bank is required to deposit at least ten per cent of its annual net
profit in a reserve fund. The balance is distributed among the shareholders as
a bonus or dividend. The shareholders receive a dividend on their investment,
varying from 44 per cent to 8 per cent. Depositors are paid from three to four
per cent on their deposits.
In 1922, there were 111 of these banks in existence in ‘Quebec, with 32,173
shareholders or members. 30,583 persons held deposits in these banks. Loans
eviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
were granted that year to the number of 13,367 and to the amount of $2,891,092.
The total business transactions for that year amounted to $11,148,323.00 and
the profit realized on the transactions was $334,395.00
The one thing necessary to make this system complete, following the
European model, would be a central bank through which the individual banks
could co-operate in the interests of each other.
When it is recalled that, when the first bank was started at Lévis on
December 6th, 1900, the total first collections amounted to $26.00 and that
this bank in 1922 had on loan $304,043.84 to over one thousand borrowers and
showed a gross profit for the year of $64,243.00, while the entire system had
done business as stated above, I think it would be admitted that this is a finan-
¢ial achievement of a very high order and justifies the faith of Mr. Desjardins
and his associates when, in order to relieve the small farmers and working people
of the Province of Quebec from the pressure of high interest rates, they under-
took to found the system of People’s Banks.
Nova Scotia
The next legislation in Canada in the direction of organizing rural credit
was passed in Nova Scotia in 1912, entitled “An Act for the Encouraging of
Settlement on Farm Lands.” This Act was amended in 1913 and again in 1915
and again in 1919. In addition, a special Act was passed in 1919 entitled “An
Act to provide Loans to Agriculturists upon the Security of Farm Mortgages.”
Long Term Loans
Under the Act of 1912, “An Act for the Encouraging of Settlement on
Farm Lands”, and its amendments, the following methods are provided for
making loans to settlers or farmers:—
(a) Through the medium of a loan company through which a borrower
can obtain up to eighty per cent of the appraised value of the farm
land to be mortgaged, the Governor in Council giving the company a
guarantee against loans up to forty per cent of the appraised value of
the farm.
(b) The Governor in Council is authorized to purchase real estate in farm-
ing districts, sub-divide it into farms or lands, repair, alter, or erect
buildings and till and seed the land and sell the real estate, stock and
improvements to settlers. Any approved loan company may be em-
ployed to act as agent in the taking of securities and the taking of
principal and interest. There is also a provision giving the Governor
in Council power to purchase stock and improvements on chattel
mortgage. Under this Act loans to the amount of $152,000 have been
made to seventy-one farmers.
The Act of 1919, “An Act to Provide Loans to Agriculturists Upon the
Security of Farm Mortgages,” provides for the appointment of a Board of three,—
(a) To lend money to agriculturists on the security of first mortgage on
farm lands.
(b) To acquire, hold and dispose of real estate as may be required.
(c) To borrow money to carry out the objects of the Board, to hypothecate,
pledge and mortgage its real property, and to sign bills, notes and
contracts and for evidences of debt or securities for monies borrowed by
the Board for the purposes aforesaid.
BANKING AND COMMERCE cix
APPENDIX No. 1
(d) To make provision for the placing of returned soldiers or other persons
with farmers, in order that they may be instructed in farming, and
(e) To make loans to a farmer who desires to erect a dwelling house on his
farm for the occupation of any person employed by him as a farmer.
The period of a loan can be for thirty years, the amount loaned not more
than seventy per cent of the value of the property, the interest at a rate sufficient
to pay the interest on the money borrowed and the cost of raising the money
by the Provincial Treasurer. This latter Act, has, however, never been put
into operation.
New Brunswick
The New Brunswick Legislature passed in 1912 “An Act to Encourage the
Settlement of Farm Lands.” This Act created a Farm Settlement Board with
powers to purchase land in the Province suitable for farming, to improve the
same, to erect houses and farm buildings thereon and to sell these lands to bona
fide settlers. Settlers were required to pay 25 per cent of the purchase price in
cash, where the property was valued at less than $1,000, and 35 per cent if valued
at more than $1,000. The interest rate was fixed at 5 per cent. The purchase
price must be paid at stated periods, the limit for final payment being ten years.
Under this Act, in the last five years, about fifty loans have been granted.
At the end of 1922, $80,439.55 was outstanding in loans. At no time have the
outstanding loans under this Act exceeded $130,000.
In April, 1923, a new Act was passed in the province of New Brunswick,
known as the “Farmers’ Relief Act.” Its aim was to relieve farmers from financial
embarrassment, to encourage agricultural development by providing for loans
upon farm mortgages at reduced rates of interest. Under this Act, municipalities
are authorized to borrow up to 75 per cent of the total value of the real estate in
the municipality for the purpose of making loans to farmers residing within the
municipality. A Farm Loan Board is authorized, consisting of three persons, two
of whom may be members of the Municipal Council. This Board makes all
necessary regulations regarding loans. The loan to the individual must not
exceed 75 per cent of the value of the farm land owned by the borrower within the
municipality; must be secured by a first mortgage and repayable by an amorti-
zation plan not exceeding thirty years. The maximum interest allowed is 6
per cent par annum.
Loans are made for the following purposes:—
(a) The discharge of liability incurred for the improvement of land used
for agricultural purposes;
(b) The acquiring of land for agricultural purposes and the satisfaction of
encumbrances thereon;
(c) The clearing and draining of land, the erection of farm buildings, the
purchase of live stock and implements.
Money is raised under the provisions of the Municipality Debentures Act
of the Province.
I have not been able to obtain information as to the number and amount of
loans made under this Act.
Ontario
Three separate acts with respect to Rural Credit have been passed in the
province of Ontario, all during the session of the Legislative Assembly of 1921.
The first is entitled “An Act for the Promotion of Agricultural Development’
(amended in 1923), the second, “An Act Respecting Short Term Farm Loans in
Ontario” and the third, “An Act to Finance Agricultural Development.”
Cx SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Leng Term
The first of these Acts provides for long term or mortgage credit, the second
provides for short term personal credit, and the third provides special means by
which the Treasurer of the Province may use savings funds in financing the other
two Acts. The Acts are based on the legislation of the Province of Manitoba
described later.
Capital Funds
Under the first Act, there is established a Board, to be known as the Agri-
cultural Development Board, which consists of three persons appointed by the
Lieutenant Governor in Council. This Board is a body corporate and has for its
duty the promotion of agricultural development as provided in the Act. The
Board, with the approval of the Lieutenant Governor is permitted to issue bonds
to the amount of $500,000 in such denominations and such rate of interest as the
Board itself may see proper. Provision is made for the purchase of these bonds
by the Province of Ontario, the money for purchase being deposited with the
Board for its own use. In addition to the above, with the approval of the Lieu-
tenant Governor in Council, the Board is permitted from time to time to issue
debentures in such denominations as it may deem advisable. These debentures
are to be issued as mortgage bonds, that is, against the security of mortgages
held by the Board. The money so raised may be used in the following manner:—
(a) Acquiring land for agricultural purposes;
(b) The erection of farm buildings essential to production;
(c) To pay off charges existing against land at the time of acquisition by the
borrower under a will or by descent;
(d) To pay off encumbrances in which cases loans shall not exceed 50 per
cent of the valuation;
(e) For the purpose of providing tile drainage;
(f) To purchase breeding live stock;
(g) To consolidate outstanding liabilities incurred for agricultural pro-
ductive purposes.
The applicant for loans must submit evidence to the satisfaction of the
Board ;—
(a) That he is a British subject of at least twenty-one years of age, and
has been resident in Canada for at least three years;
(b) That he has had at least three years’ experience in farming and has
displayed average ability and capacity;
(c) That he is of good character;
(d) That he is actually engaged or intends to engage upon the land upon the
security of which the loan is to be made.
The limit to which a loan can be made is $12,000 and it must be secured
by first mortgage upon lands suitable for agricultural purposes.
Provision is made for repayment in annual instalments of principal and
interest sufficient to discharge the debt within a period not exceeding twenty years.
The expenses of the conduct of the Board, including salaries, are paid out
of the consolidated revenue of the Province.
This Act has only been in operation for two years. Over 1,500 applications
have been received for loans, of which 1,411 have been granted. The total
amount of loans made up to October 31st, 1923, was $5,.769,955.00. .
The Ontario system of long term loans is distinguished from the American
system in that the individual deals directly with the Board and not by means
of a local association.
BANKING AND COMMERCE cxl
APPENDIX No. 1
Short Term Farm Loan Associations
The second Act provides for short term loans. This scheme operates under
the Agricultural Development Board, as does the scheme for long term loans.
Under this scheme, local associations, known as Farm Loan Associations, are
required. Any person resident within a described territory, which has been
approved by the Board, and engaged in farming operations or agreeing to become
so engaged within one year, is eligible for membership.
In order to form a local Farm Loan Association, certain provisions with
regard to capital stock must be complied with, viz.:—
(a) Thirty members are necessary and each member must subscribe for one
share at a par value of $100.00;
(b) One-half the amount subscribed by the members must be subscribed
by the corporations of local municipalities in the territory where the
Association is formed;
(c) An amount equal to that subscribed by the municipalities must be sub-
seribed by the Ontario Government.
This arrangement for capitalization of the Local Association differs entirely
from the American system.
Each member must pay in 10 per cent of the par value of his stock at the
time of subscription and the balance when called for, the payments by municipal
corporations and the Ontario Government being made in the same proportion.
Provision is made for the combination of two or more municipalities under one
organization.
The board of management, consists of two directors appointed by the muni-
cipal corporations subscribing, two directors appointed by the Lieutenant Gov-
ernor in Council; the subscribing members elect from among themselves a pres-
ident, vice-president and one director, who, with the four previously named,
constitute the board of management.
Under this Act, short term loans are made for one or more of the following
purposes:
(a) Purchase of seed, feed, fertilizer and other supplies;
(b) Purchase of implements and machinery;
(c) Purchase of cattle, horses, sheep, pigs and poultry;
(d) Payment of cost of carrying on any farming, ranching, dairying or
other agricultural operations;
(e) Payment of the cost of preparing land for cultivation;
(f) Fire or life insurance where required, in the opinion of the directors,
as collateral security for a loan made for any of the above-mentioned
purposes.
No loan is made to exceed $2,000.00.
The maximum rate of interest allowed is 7%, one-seventh of which goes to
the local association for expenses.
Fifteen associations had been formed in Ontario up to October 31st, 1923,
and 399 loans were made amounting to $310,875.00.
The capital required for carrying on the business of the association may be
obtained in two ways:—
(a) The Treasurer of Ontario may, with the approval of the Lieutenant
Goverhor in Council, make loans to the Board; and
(6) The Minister of Agriculture may, with the approval of the Lieutenant
Governor in Council, enter into agreement and guarantees with banks,
loan companies and other corporations for securing money for the
purposes of the associations, and may fix interest rates and terms of
repayment.
ca SELECT STANDING COMMITTEE
14-15 GEORGE V, A, 1924
I doubt if this scheme will play a very large part in the business organiza-
tion of the farmers of Ontario.
The third Act, to finance agricultural development, authorizes the Treasurer
of Ontario to borrow money by means of deposits in any amounts from any
person or corporation and to open offices for this purpose in such parts of Ontario
as seem to him wise.
In so far as this Act affects agriculture, it provides that the money raised
in this way may be available:—
(a) To make loans to members of associations under the Ontario Farm
Loans Act; and
(b) To purchase bonds or debentures issued under the Agricultural Develop-
ment Act.
By this Act, savings bank deposits are made available through the Agri-
cultural Development Board for agricultural purposes.
It has resulted in a considerable share of the savings deposits in Ontario
going to the Government.
Manitoba
In the Province of Manitoba, three Acts respecting Rural Credit have been
passed and are now in operation. One of these, “An Act to Foster and
Encourage Agricultural Development by Providing for Loans upon Farm
Mortgages at Reduced Rates of Interest”, is a long term mortgage scheme; the
second, “An Act Respecting Rural Credits,” provides machinery for the making
of short term personal credit loans; and the third is entitled “An Act to Encourage
POvanee: to Authorize the Borrowing of Such Savings and the Issue of Securities
herefor.” :
Long Term
Under the first Act, there is established in the province a body corporate
under the name of the Manitoba Farm Loans Association, to which, from the
management point of view, is given all the general powers of a financial
corporation.
The affairs of the Association are managed by a Board known as the
Manitoba Farm Loan Board, consisting of five members appointed by the
Government. Of these members, one, the Commissioner of Manitoba Farm
Loans, is directly appointed by the Lieutenant Governor in Council and at
pleasure, one may be nominated by the Union of Municipalities of the province
and one by the Grain Growers’ Association. The period of service is designated
by the Lieutenant Governor in Council. All the expenses, including salaries,
together with all other proper expenditure incurred by the Board, must be paid
out of the funds of the association.
Capital Stock
The capital stock of the Association, which was originally $1,000,000,
is now fixed by an amendment to the Act at $550,000, divided into 110,000
shares of five dollars each. These shares can only be owned by borrowers on
farm loan mortgages under the provisions of the Act, and by His Majesty in
the right of the Province. Every borrower must purchase capital stock of the
Association equal to five per cent, of the value of the desired loan, the same
to be paid in cash or deducted from the loan. The certificates of shares issued
are not transferable, unless the property on which the mortgage is held is
sold, in which ease the shares may be transferred with the sale.
BANKING AND COMMERCE exill
APPENDIX No. 14
Under the Act, one-half the share capital of the Association is purchased
by the Government, which also is authorized to advance to the Association an
amount equal to the paid up capital of its members, the total not to exceed
$550,000.
The rate of interest charged on loans made by the Association, which was
originally 6 per cent, was fixed by an amendment to the Act in 1921, at 7 per cent
per annum.
The amount of the loan must not exceed 50 per cent of the estimated
value of the land mortgaged together with the value of the improvements upon
the land, the appraisals being made on a valuation for agricultural purposes only.
Loans are made only for the following purposes:—
(a) The acquiring of land for agricultural purposes and the satisfaction
of encumbrances on land used for such purposes;
(b) For the cleaning and draining of land;
(c) The erection of farm buildings;
(d) Purchase of live stock and implements;
(e) Discharge of liabilities incurred for the improvement and development
of land used for agricultural purposes and any purpose calculated to
increase land productiveness.
Loans are made only to those actively engaged or intending to engage in
the cultivation of the land and the Board may require borrowers, if in their
judgment they deem it necessary, to insure crops against damage by hail,
storm, etc., in a company approved by the Association. Should any borrower at
any time use the money loaned for purposes other than the purposes for which
it was borrowed, the mortgage at once becomes due and payable.
Sale of Bonds
The Lieutenant Governor in Council is authorized to empower the Board,
on behalf of the Association, to raise by the issue of bonds against first mort-
gages, a sum not to exceed twelve million dollars. The issue at any one time
must not exceed 95 per cent of the value of the mortgages held as security. The
rate of interest at which these bonds can be issued must not exceed 5 per cent per
annum. These bonds are guaranteed as to principal and interest by the Govern-
ment of the Province, and, in case of the Association not being able to meet
interest charges, they become at once a direct charge upon the revenues of the
Province.
Further, it is provided that, pending a sale of bonds by the Association,
which have been authorized by the Lieutenant Governor in Council, the
Province may advance or guarntee a loan to the Association at any bank for
a sum not exceeding at any one time $1,000,000.
All the securities, including the capital shares issued under this Act, are
free from all kinds of taxes other than federal taxation and the succession
duties.
All mortgages are repaid on an amortization plan covered by 30 annual
instalments, the debt to be extinguished in 30 years.
Up to the 31st December, 1923, approximately $3,000,000 had been loaned
under this Act. There has been a great demand for further loans, but the
Government did not feel like going further into the scheme for the present.
It is hardly necessary to point out that this plan, like the Saskatchewan
plan, differs materially from the farm loan scheme in the United States. While
the Farm Loan Association is a corporation for the purpose of doing business,
all the money acquired is acquired through an arrangement with the Govern-
ment and with Government guarantees, while the officers who manage it are
1—8
CX1V SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
subject to the direct action of the Lieutenant Governor in Council. In reality,
individuals receiving loans are receiving Government moneys with all the
disadvantages of the sense of close contact with the Government.
Short Term Loans
The second Act, The Rural Credits Act, is an Act authorizing the making
of short term loans. The Act authorizes the organization of Rural Credit
Societies in any part of the province. Such a society is organized on the basis
of a petition presented to the Lieutenant Governor in Council, signed by not
less than fifteen persons engaged in agriculture, setting out—
(a) the names, addresses, occupations, and land owned or occupied by
them;
(b) that the petitioners desire to organize Rural Credit Society in a
given locality within the Province;
(c) the name of the municipality or locality which is to be the place of
business ;
(d) the proposed name of the society;
(e) the amount of capital stock and the number of shares into which the
stock is divided with the mount paid on each subscription;
(f) the names of not less than three nor more than seven of the subscribers
who shall be provisional directors of the society.
The Lieutenant Governor in Council may then issue letters patent, incor-
porating the society with the prescribed powers under the Act, after which the
organization of the society can be completed.
The society is not permitted to commence business until it has received
subscriptions in capital stock from at least 35 persons engaged in farming,
of $100 each and of which not less than 25 per cent has been paid.
The Government of the Province is authorized to subscribe an amount equal
to one-half of the total amount subscribed by the individual shareholders, the
amount to be paid in in like proportion to the individuals. The Government
may borrow $500,000 on debentures for this purpose. Any municipal corpora-
tion or combination of two or more municipalities may also subscribe an amount
equal to that subscribed by the Government of the Province. The municipalities
subscribing may issue debentures for the purpose of paying their subscription.
The business management of each society is vested in a board of directors
composed of nine members, three elected annually by the individual subscribers,
three appointed by the council or councils of the municipalities subscribing to
the capital stock and three by the Lieutenant Governor in Council, each to
serve for three years. It is necessary that at least one of the directors shall be
a graduate of the Manitoba Agricultural College, or otherwise specially qualified
in agriculture. :
The officers of the society are appointed by the directors and registered by
the Provincial Secretary and all the subscribing municipalities in the usual
way. The secretary is the only paid officer and he may not be a member of the
society, but is appointed because of his suitability for the work. The annual
meeting is called for once a year.
The objects of the Rural Credit Societies organized under the Act are:—
(a) To procure short term lcans for members for paying the cost of farm
operations of all kinds and increasing the production of farm products;
(1) and, particularly, for purchase of seed, feed and other supplies;
(2) purchase of implements and machinery;
(3) purchase of cows, hegs, sheep, pigs and other animals;
BANKING AND COMMERCE CXV
APPENDIX No. 1
(4) payment of the cost of carrying on any farming, ranching, dairy-
ing or other like operation;
(5) payment of the cost of preparing land for cultivation;
(6) payment of not more than one-half the cost of erecting silos.
(b) To act as agents for members in purchasing supplies and selling pro-
ducts;
(c) To promote co-operation for the improvement of conditions of farm
life and to extend its operation to all residents of the district,
The moneys loaned under the Act are arranged for either with a chartered
bank or with private individuals, Loans are made on a note signed by the
applicant, approved by the directors and endorsed by the secretary, on behalf
of the society, which thereby becomes responsible to the extent of the assets of the
society, in case of default. The rate of interest is fixed so as not to exceed
7 per cent per annum, of which 1/7 is paid to the local association for the pur-
poses of the business of the society, so that only 6 per cent is paid to the
lender. All loans terminate on the 31st day of December of the year in which
the loan is made, but application for renewal for one year beyond that date is
admissible, provided the loan was made for purposes not productive within a
year.
Under an amendment to the Act in 1923, the Province is authorized to lend
to any society from the treasury, ‘“‘to the extent of, but not exceeding, twenty
times the paid up capital and surplus assets of such society, provided that no
society shall incur liabilities, whether direct or contingent, in excess of the
amount of its capital and surplus assets.”
As security for the Joan, so far as the individual is concerned, all animals,
machinery, or goods of any kind purchased with the proceeds of the loan,
together with the offspring of such animals and crops or any products produced
as the result of the loan are subject to lien without documentary specification.
For default in payment or dishonest practices on the part of the borrower,
there are very rigid enactments.
The capital stock of any society must be invested in Government bonds
or bonds guaranteed by the Government and all the income derived must be
paid into the society to be applied: —
(a) in payment of the necessary expenses of the society;
(b) in payment of dividends on the stock of not more than 6 per cent;
(c) in accumulating a reserve which may, in the discretion of the directors,
be invested in the same way as the capital stock.
Over and above all the societies there is a supervisor appointed by the
Lieutenant Governor in Council, known as the Supervisor of Rural Credit
Societies. His duties are defined by the Lieutenant Governor in Council.
In 1923, an investigation of the working of these societies was authorized
by the Government and a report made upon them by Professor Jackman and
Mr. Collier. The report was very condemnatory of the handling of the busi-
ness of the societies and indicated the possibility of a very large loss to the
Government. Approximately $3,000,000 is outstanding in loans made under
this system of which at least three-quarters are renewals of loans with out-
standing interest charges of approximately $30,000.
The Act originally did not place a limit to the borrowings, the result being
that some individuals have received very large loans. Amendments have since
been passed, however, restricting loans to $2,000.
The third Act, “An Act to Encourage Savings, to Authorize the Borrowing
of Such Savings and the Issue of Securities Therefor,” is similar to the corre-
sponding Act in Ontario.
1—83
CXVi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Saskatchewan
A Long Term or Mortgage Credit plan has been in operation in the province
of Saskatchewan for some years. It is worked under an Act named “ The
Saskatchewan Farm Loans Act.” The Act is administered by a Board called
the Saskatchewan Farm Loan Board, consisting of one commissioner and two
other members appointed by the Lieutenant Governor in Council. The Board
is a corporation and, while receiving its moneys from the Government, works
independently.
The Board has power—
(a) to lend money on the security of farm mortgages;
(b) to invest disposable funds by depositing same with any chartered
bank, or in any other manner in which the trustees are permitted by
law to invest trust funds;
(c) to acquire and hold real estate for the purposes of the Board and to
dispose thereof when no longer required for such purposes;
(d) to borrow money as required for the purposes of the Board and to
perform such transactions by way of security as are necessary;
(e) to do all the necessary and incidental business resulting from the oper-
ation of a money lending agency on farm property.
The Farm Loan Commissioner holds office for ten years, unless removed
for cause as the result of action in the Legislative Assembly. The other two
members hold office during the pleasure of the Lieutenant Governor in Council.
No loan is permitted excepting on the security of a first mortgage on farm
lands situated within the Province. Encumbrances, however, may be upon the
- land in the nature of legal priorities under the laws of the province.
Loans are made for the following fixed purposes :—
(1) For permanent improvements to the property mortgaged, which, in
the opinion of the Board, will assist in the productive development of
the property;
(2) Payment of liabilities which, in the opinion of the Board, have been
incurred for any of the above purposes;
(3) In special cases and under special conditions for the cultivation of land
for agricultural purposes.
No loan is made for an amount greater than 50 per cent of the Board’s
valuation of the security offered.
Loans are made for a term of 30 years and are payable by amortization.
The rate of interest charged is to be sufficient to pay the interest on and
the cost of raising the money as well as the expenses of conducting the business
of the Board and other incidental expenses.
The working capital necessary is advanced from time to time by the
Provincial Treasurer under the authority of the Lieutenant Governor in Council.
The total sum permitted to be so raised under the Act is $10,000,000, the securi-
ties used for raising it being Provincial securities. The term of years and the
rate of interest to be paid by the Province is left to the determination of the
Lieutenant Governor in Council.
The amount of advances made by the Provincial Treasurer is limited by
the amount of the mortgages held by the Board and hypothecated to the Pro-
vincial Treasurer as security for the advance.
The Board is authorized, pending the disposing of securities, to borrow
from any bank or corporation with the approval of the Lieutenant Governor in
Council.
BANKING AND COMMERCE CXxVii
APPENDIX No. 1
In the working of the Act, the Government has not authorized the selling
of debentures at a rate greater than 5 per cent and has fixed the rate of interest
for loans at 63 per cent. The Government charges the Board 5} interest for
the money, 4 being assumed to be sufficient to cover the expenses of sale and
other incidental expenses to the department. The Board has thus a margin of
1g per cent to cover expenses of administration and possible losses. This is
regarded by the Farm Loan Board of Saskatchewan as sufficient for the
purpose.
Up to December 31st, 1923, approximately $9,000,000 was loaned out under
the scheme.
It will be seen, therefore, that in Saskatchewan, while the money is raised
directly on the credit of the Province, it is passed over to a Board which is a
separate corporation, through which all the business is handled. Further, the
Saskatchewan plan does not use the local association in any way, so that the
individual borrower comes in direct contact with the Board. The relation of
the borrower to the Government, therefore, is much nearer than is the borrower
to the Government under the American farm loan scheme and the plan resembles
more closely the plan recently inaugurated by the state of Minnesota,
Most of the loans were made prior to 1922. The difficulty of securing money
at 5 per cent has retarded the growth of the scheme.
Alberta
There are two Acts on the statute books of the Province of Alberta, dealing
with rural credit, one entitled “An Act to Foster and Encourage Agricultural
Development by Means of Standard Forms of Investment upon Farm Mortgage
and the Equalization of Rates of Interest.” It is cited as the “ Alberta Farm
Loan Act.” The other, entitled “An Act Respecting Co-operative Credit” is
cited as the “ Alberta Co-operative Credit Act.” The first of these is to provide
at its title indicates, Long Term or Mortgage Credit; the second is intended
to provide Short Term or Personal Credit.
Long Term Loans
The Alberta Farm Loan Act, which was passed in 1917, is, in its general
outline and purpose, much like the corresponding Act in Manitoba. As it has
never been put into operation, I do not think it necessary to go into a detailed
description.
Provision is made for the advancing of money by the Government to a body
known as the Alberta Farm Loan Board, a body incorporated for the purpose of
making farm loans. The limit of the loan is fixed at 40 per cent of the appraised
value of the land offered for security calculated on its productiveness as farm
land, the maximum amount, however, not to exceed $5,000.
The purposes for which a loan is made are clearly defined and are related
entirely to farm production. Provision is made for the issuing of bonds to be
known as the Alberta Farm Loan Bonds, the same being unconditionally
guaranteed by the Government of the Province. The mortgages are to be
repaid through the usual amortization scheme, covering a period of thirty years.
The rate of interest is not fixed. It must be sufficient to pay the interest on the
bonds and to cover the current expenses of the organization.
Short Term Loans
The Act respecting co-operative credit in the Province of Alberta is also
similar to those in the other Provinces of Canada. It provides for the organiza-
tion of Co-operative Credit Societies in the Province. A Co-operative Credit
eXvill SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Society can be organized on the presentation of a petition to the Lieutenant
Governor in Council of not less than fifteen persons, who are engaged in
farming operations and who subscribe for stock in the society at par value
to the amount of not less than $1,500, of which not less than 20 per cent must
have been paid up, the balance to be covered by the subscriber’s promissory
note payable to the society at 6 per cent interest. The society, however, can-
not commence business until there are thirty members with subscribed stock
equivalent to $3,000, being paid under the same conditions as above.
After the society has become duly incorporated, an additional 20 per cent
of the stock becomes due on the following first day of January and so on in
each successive year, until the full value of the stock has been paid up.
The society is organized to exercise its function in a specific district.
The management of the society is vested in a board of directors, four of
whom must be elected at the first meeting and annually thereafter by the
subscribers, three of whom are named by the Provincial Treasurer and one by
the municipality giving a guarantee to the society.
Provision is made in the Act for the guaranteeing of the securities, obliga-
tions and financial undertakings of any society by the Lieutenant Governor in
Council. Further, the Council of any municipality in the Province may also
guarantee the securities, obligations, or financial undertakings of any society,
for an amount equal to one-half the total amount of stock subscribed by the
shareholders. On assuming a guarantee for an amount of money to the society,
the municipality is permitted to advance the money out of the general funds
of the municipality without taking a vote of the rate-payers.
All the societies under the Act come under definite regulations and by-laws
approved by the Lieutenant Governor in Council.
The objects of the Co-operative Credit Societies are:—
(1) to procure short term loans for its members for paying the cost of
farming operations of all kinds and increasing the production of arm
products;
(a) the purchase of seed, feed and other farm supplies;
(b) the purchase of implements and machinery;
(c) the purchase of cows, horses, sheep and other live stock;
(d) payment of the cost of carrying on any farming, ranching, tpl
raising, dairying and other oper rations;
(e) payment of the cost of preparing for cultivation;
(2) to act as agent for the members for purchasing goods, chattels, effects,
stock, grain, coal, wood, lumber, merchandise and any other article
or commodity required by subscribers and in selling any products
produced by subscribers and in placing hail and fire insurance;
(3) to promote co-operation among its members for the improvement of
conditions of farm life.
Loans are made only to members of the society and at a rate of interest not
exceeding 75 per cent, ‘of which one-half of one per cent is returned to the
society for the purpose ‘of meeting the expenses of the society.
All applications for loans must be accompanied by a statement of assets
and liabilities and the endorsement of the local society. Before the moneys
are advanced the borrower must sign a note for the amount of the money to be
advanced, together with the interest on it, which, being endorsed by the
society, can be used to obtain money from any bank or company approved
by the Lieutenant Governor in Council, by whom, as stated above, it is also
guaranteed.
Provision is made in the event of the borrower not being able to pay the
amount at the date of maturity, to renew the note for one year, provided the
‘
|
2
————— ts
BANKING AND COMMERCE Cxix
APPENDIX No. 1
purposes for which the loan was granted are not fully productive within one
year. Should it become necessary because of the default of the borrower to
seize any property of a borrower, the secretary-treasurer may act as bailiff and
seize and sell the property without any other authority than that of the
directors of the society.
Provision is also made for the retirement of a shareholder on payment of
his obligation.
Any profits accruing to the society from interest or other sources are
applied :—
(a) in the payment of the necessary expenses of the society;
(b) in the payment of dividends on paid up stock held by subscribers
of not more than 6 per cent per annum; and
(c) in accumulating a reserve which may be invested in the same manner
_as the paid up capital.
During the year 1923, $830,560.00 was advanced to these societies, of which
$245,712.00 was outstanding at December 31st, 1923.
In some of the provinces of Canada, there are, in addition to the fore-
going, special Acts dealing with special phases of agriculture. I have not
deemed them of such importance as to require description for this report.
Summary—Canadian Provinces
There are no available statistics regarding the amount of farm mortgage
loans in Canada so that it is not possible to state the ratio of loans made
under Provincial Government Organizations to the whole mortgage indebted-
ness of the country. The total loans made through the Provincial machinery,
just described, is about $23,000,000, an amount probably not more than 10
per cent of the whole, and certainly not enough to regulate interest rates on
mortgages, but enough to prove the value to the farmers of the Amortization
Principle. It is an unfortunate fact that most of the organizations described
have for the moment ceased to function because of the difficulty of obtaining
money at sufficiently low rate of interest, and because of the danger of em-
barrassing the Provinces by increasing too greatly their bonded indebtedness.
One other matter deserves special mention. In all the Provinces the Boards
of Management have had difficulty in overcoming a disposition on the part
of a considerable proportion of borrowers to regard lightly obligations to the
Government. “It is Government money, they can wait” seems to be altogether
too common an idea. The Administration Boards as well as ministers in
charge of the Provincial Treasuries have had to call attention repeatedly, to
this attitude of mind. It is being overcome but only by the use of rigid and
decisive means. In the United States the same difficulty was encountered at
first. It has been largely overcome by educational methods, by selling the
bonds of the Land Banks in the districts where the borrowers themselves lived,
thus showing to the borrowers that the money loaned was also borrowed in
their interest, and where necessary by a rigid enforcement of the regulations
regarding repayments.
With regard to interest rates in Canada there is little to add to the inform-
ation brought out by the special committee of the House of Commons last year.
The report of the Alberta Commissioner, made in 1922, after a careful study of
that Province stated that the rate for short term loans from the Chartered
Banks varied from 8 to 10 per cent “according to the condition of the district
and the degree of competition present.” The rate of interest on mortgages has
been estimated to be 8 to 9 per cent the variation being due to similar causes.
Cxx SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
These figures would probably hold for Western Canada as a whole. In the
Eastern Provinces the interest charges would be lighter. The aim of the Pro-
vincial Credit Organizations has been to lighten this burden by fixing rates
varying from 6 to 7 per cent. They have succeeded only in proportion to the
business done as the total loans have not been enough to afford effective
competition. It remains for consideration whether agriculture can prosper
under such charges.
BANKING AND COMMERCE CXxi
APPENDIX No. 14
SECTION VI
CONSIDERATION OF METHODS IN RELATION TO CANADIAN
CONDITIONS
Long Term Mortgage Credit
Even a casual study of the foregoing description of the various methods
of dealing with the problem of long term or mortgage credit will show that, with
variations in detail, three methods have been employed:
(1) The private investor, under which should be included the private
corporation restricted only by common law conditions;
(2) Public corporations working under special legal restrictions with or
without government support—
(a) conducting business in the interest of the borrowers;
(b) conducting business in the interest of lenders; both within restric-
tions fixed by law;
(3) Direct government loans.
With regard to (1), it is probably true that a very large share of the
mortgage business in every country is in their hands. Under this I would
include the private individual who loans directly himself and companies
organized under general laws, such as insurance companies and corporations
without legal restrictions with respect to interest charges. I think it may be
truthfully said that wherever the mortgage business has been left entirely in the
hands of persons or companies operating in this way, the claim has ultimately
been made that rates of interest have remained high. So far as I am aware, no
country in the western world continues to leave the solution of the farm mortgage
problem entirely in the hands of organizations developed in such a way. In
times of special prosperity, things may work out all right under such a plan,
but in times of depression, in nearly every country in the world other methods
have always been resorted to, at least within the last century. As has already
been pointed out, it was the demand for more reasonable interest and govern-
ment supervision that led to the whole scheme of Farm Mortgage Bonds in
Europe, which has since been copied in the United States and in the Provinces
of Canada. It should be stated, however, that those who claim that at the
present time there is no necessity for government co-operation—and that claim
is made everywhere on the American continent—base their claim on the belief
that competition in money lending will sufficiently regulate the business.
(2) (a) In every civilized country, corporations have been developed of the
second type. The Landschaft in Germany, for example, is a public corpora-
tion organized under special legislation with definite restrictions upor its
business, which aims to so improve and regulate farm mortgage security,
so as to be able to secure cheaper rates of interest and to conduct its business
solely in the interest of the borrowers.
There is no declared purpose in the foundation of the Landschaft to force
people to lend money at unremunerative rates; the express purpose was to so
liquefy the mortgage as an investment, to give it such backing, that as a
security, it would rank in its call for money with the best kind of public
investment. There is absolutely no question that they succeeded in doing this
and by the institution of Long Term Mortgage Bonds, secured for the owners
of farm lands loans in competition with governments and municipalities and at
rates of interest equal to that which they obtained. The persons so investing
CXxii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
invested on their own initiative, because they were convinced of the value of the
security offered. The only public assistance granted to them was supervision, so
as to give public confidence as to the soundness and honesty of their methods
of carrying on their business.
Under (2) (b) come such organizations as those authorized in Great Britain
under the older Acts which are described earlier in this report. For example, the
Land Improvements Company \Act of 1853 gave to the Company authority to
carry on business in land mortgages for long terms of years in connection with
definite operations for the improvement of agriculture. In doing so, the British
Government put the stamp of its approval upon the undertakings and, in
order to give public confidence, insisted that every such undertaking should be
subject to proper expert inspection and carried out by well established methods.
In return for this approval, which, while it may appear to have been a restriction,
in reality gave security to the undertaking, they made a rate of interest greater
than 5 per cent illegal. The fact that all the monies have since been forthcoming
to carry out the projects entered into by this Company, which is still operating
on a large scale, shows that the regulation did really not work out as a restriction
and that in all probability investors were glad of the opportunity to place their
money in investments made secure by the regulations of the Act.
The Crédit Foncier of France is an organization of a similar character.
The business is being conducted really in the interests of investors. It has been
given a practical monopoly in France of public mortgage business and received,
in addition, definite support from the Government in getting started. In return
for the privileges granted and for the assistance given, the Government fixed a
definite limit of interest charges to be made on mortgages, namely, not to be
greater than six-tenths of one per cent above the rate at which bonds for the
purpose could be sold to the public. The French Government does not guarantee
these bonds, but the supervision and control, which have been exercised by
Government experts have stabilized security and given such confidence to the
French investor that he is willing to accept the rates of interest offered. In this
case, inspection and supervision were established because it was demanded by
the public and because without it, security of land mortgages could not be
established in the minds of the public so as to give the necessary confidence to
secure rates of interest commensurate with the security. It was firmly believed
that private enterprise did not offer the necessary competition to give agriculture,
because of its lack of organization, interest rates commensurate with the
security, and that by organization the security could be so improved as to attract
the attention of the investing public.
With regard to institutions organized under the Farm Loan Board of the
United States, it has already been pointed out that, the Federal Land Banks
function somewhat as the Landschaft in Germany, while the Joint Stock Banks
of the same system resemble the Crédit Foncier. That is to say, they are
institutions organized under public control and supervision in such a way as to
give confidence to the investing public in the security offered for loans, but, at
the same time, doing business in such a way that the profits beyond a guaranteed
return to lenders go to the benefit of the institutions and, therefore, of the
organized borrowers in the case of the Federal Land Banks but to the investors
in the case of the Joint Stock Banks.
While the United States Government put behind the Federal Land Banks
$9,000,000 free from interest charge for a period of years, nevertheless, the policy
pursued has been to bring them to a state of independence and to make agri-
culture, through them, guarantee its own financial well-being.
Already, these institutions have returned to the United States Government
three-quarters of the capital originally granted to them and are now financing
BANKING AND COMMERCE CXxili
APPENDIX No. 1
the whole administration out of their own funds without any charge upon the
public treasury. The Federal Farm Loan Board continues its supervision and
care in the interest of the investing public. A definite restriction is placed by
law upon interest charges and to assist them in living within these charges, a
national selling agency has been authorized. The only other special privilege
which they have in competition with other lending institutions is the freedom
from the taxation of their bonds, a much discussed and controversial subject.
With respect to that, I may say that I heard the principle of tax-free bonds
universally condemned in the United States by all shades of opinion, but the
Federal Farm Loan Board maintained that so long as state governments and
municipalities, including towns and cities, had their bonds free from taxation,
it was only fair that the bonds issued on farm mortgages should also be free
from taxation. I think there can be no question that the issuing of tax-free
bonds is working out enormously to the benefit of the well-to-do. Without
question, also, it has been a benefit to the municipalities, and it has greatly
assisted the Federal Land Banks in the sale of their bonds.
(3) The third method previously: described is that of direct government
loans. This has not been practised to any great extent, so far as my knowledge
goes, elsewhere than on the American continent and in the British Dominions.
In Great Britain, the New Act permits governments loans for a short period of
years and is intended to give direct assistance to persons who, having bought
lands on the basis of the stability of certain legislation, suffered because that
legislation was repealed.
In most of the States of the United States, where loans are being made by
the State governments, they are being made either directly or indirectly from
the State Treasury. Even where bonds are only guaranteed by the governments,
the officers administering the funds derived from them are State officers. The
same is true, in the main, of what is being done in the Provinces of Canada. -
There can be no question, I think, that in the administration of institutions
dealing directly with governments, the dangers of political interference and of
consequent loss to the public treasury is very great. Even in the United States,
the work of the Farm Loan Board, removed as it is from the direct control of
the Government, has suffered because men in public life have deemed it to be
to their political advantage to speak critically of its policies without making
an effort to get a knowledge of the facts.
When we come to consider the question of long term credit from the point
of view of Canada as a whole, we are faced with the fact that no organization
of a truly Canadian character has been developed. It is freely stated by those
engaged in the farm mortgage business that none is necessary, that there is
sufficient competition already in this business to take care of all the require-
ments of the country. :
It is further claimed that the restrictions by way of taxes and priorities
over mortgages have become so great in some, at least, of the Provinces of
Canada that freedom of action is practically denied mortgage companies in
carrying on their business. It was even suggested to me that with greater free-
dom of action and freedom from restrictions, the mortgage business of the
country could be done at one to two per cent less cost than at present. Whether
this be true or not, it is difficult to exactly determine. I have not yet found
any lender who was willing to commit himself definitely to an agreement that,
if restrictions were removed, prices on mortgages would be reduced. My judg-
ment is, this is a matter of such serious importance that a conference between
representatives of the mortgage organization of Canada and the governments
responsible for the legal limitations complained of and the leaders of the
farmers’ organizations in the country should be held to discuss the whole
exxiv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
matter and to see whether some scheme could not be devised that would remove
the suspicion and doubt that have arisen in connection with it.
I think it cannot be denied, referring especially to Western Canada, that the
mortgage business is conducted in an exceedingly expensive manner and that
reasonable co-operation between loan companies might greatly reduce the present
cost of administration. The Federal Land Banks of the United States are to-day
conducting their business on a margin of one per cent and are setting aside out
of that a considerable margin for possible losses. Figures are not available for
Canada as to the cost of administering the farm mortgage business, but I think
there can be no doubt that it is much beyond these figures.
Further, there is without question, a considerable number of farmers in
Canada, who, following the urgent advice given during the war and at the close
of the war to continue production, find themselves, due to the heavy deflation, in
the same position that farmers found themselves in England and the United
States, and for whom some plan of amortization of loans is absolutely necessary,
if they are to be able to continue on the land. This demand is being met to-day
only in a very limited degree. It is very doubtful whether the Provinces alone
can continue to develop long term mortgage business without taking risks greater
than they should take in connection with their own financing.
Now, while I am firmly of the opinion expressed by Sir Horace Plunkett
and already quoted, that agriculture must be a self supporting industry, I
believe with equal confidence that there is a need in Canada for some organiza-
tion co-ordinating the credit which the farmer has to offer in such a way as to
make it more attractive to the man who wishes to loan his money at a reasonable
rate of interest with proper security. Every country in the civilized world has
ultimately been compelled to take such a step. When it is remembered that two
per cent, under the ordinary amortization scheme, will amortize a farm mortgage
in 20 years, therefore, a reduction of two per cent in interest is equivalent in 35
years to the capital debt, the significance of the foregoing statement will be
apparent.
Short Term Loans
With regard to short term loans, as already pointed out, two things have
been aimed at—
(1) to organize the security offered for them so as to secure reasonable
rates of interest, and
(2) to increase the time of the loan, consistent with the seasonal production
of agriculture.
It is quite apparent from the facts already related that three methods have
been employed in securing these aims—
(1) the better. regulation of the security offered by means of co-operation
with either limited or unlimited liability and government supervision;
(2) by direct government assistance;
(3) by a combination of the above.
With regard to (1), on the European continent, generally, the better organ-
ization of security so as to enable agriculture to be self-sustaining is the aim of
the co-operative credit movement.
The Intermediate Credit Banks of the United States have been organized
with the same idea in mind. They have been granted public organization and
supervision and a portion of their capitalization, in order to make it possible
that all charges shall ultimately be borne by the business in the interest of which
they were instituted. A special regulation in the Act of incorporation prohibits
the United States Government from guaranteeing any of their obligations.
BANKING AND COMMERCE CXXV
APPENDIX No. 1
With regard to (2), direct government assistance, broadly speaking, all
State loans in the United States are being made through organizations having
direct contact with the government, although in some of these, the principle of
establishing local co-operative associations is followed.
In so far as short term loans are made under the Australian and New
cone organizations, I think they may be considered as direct government
oans.
(3) In many countries, government assistance and co-operation are com-
bined. In France, as has been pointed out earlier in this report, the Bank of
France, functioning as a Bank of Issue, is compelled to make annual grants for
the support of the co-operative banking institutions. Theoretically, these
advances are made by way of a loan, but I do not think that the possibility of
their return is seriously contemplated.
In a limited sense, the Federal Intermediate Banks would come under this
classification, as the capital of the banks has been provided by the Federal
Government. On the other hand, these institutions are required to pay interest
on the money borrowed and, further, a rather remarkable provision, that while
the Government refuses to guarantee the securities of the banks, all the profits
beyond a certain amount must be returned to the United States Treasury as a
franchise tax for the right of doing business or to be applied to the United States
debt.
The organizations in Canada, in the main, come under this classification,
that is to say, they are based on the organization of co-operation, but are
directed and supported by the Government.
With regard to the organization of short term credit in Canada, I think there
can be not doubt that some reorganization in connection with it must take place.
I do not wish any statement I make to be taken as a criticism of the operation
of the banks in Canada. That is not my business. I have no doubt that the
statement made by bank organizations as to the losses they have had in the last
few years are absolutely true, but I think it is equally true that, excepting in
the case of well established farmers, the short term bank loan at present is not
sufficient to carry the farmer’s operations. Many of the leading bankers of the
country admit this to be so. The General Manager of the Canadian Bank
of Commerce in the following statement recently made in an address, shows
that the great bankers of the country are cognizant of the problem with which
agriculture is confronted :—
“The discussion of the problem of financing the operations of Cana-
dian farmers, especially in the West, occupied much of the time of the
last session of Parliament, much evidence was submitted, but as yet no
practical scheme seems to have been evolved. Unquestionably, in an
ordinary industry, if the capital already invested cannot be profitably
employed it is useless to look for more. But the importance of agriculture
as a basic industry and the plight of so many farmers during recent years
force the problem to be approached from no ordinary angle. During the
discussion in Parliament this Bank suggested that a possible solution might
be found in money borrowed by way of the issue of long term securities,
the marginal risk to be carried by the issue of stock of a corporation to
be formed for the purpose, the money for which would be found in such
proportion as might be agreed upon by the Dominion Government, the
Governments of the various Provinces interested, the banks and other
large corporate interests who share in financing the farmers. The details
might prove difficult to work out, but the plan of financing such require-
ments by long term securities, rather than from moneys repayable on
demand, is unquestionably sound from the economic point of view.”
CXXVi “SELECT STANDING. COMMITTEE
14-15 GEORGE V, A. 1924
There can be no doubt that the establishment in Canada of a Short Term
Credit System based on the formation of Local Associations for co-operative
purposes would be much more difficult than in most European countries, or
even in the United States. The uniformity of the population and the perman-
ency of family relations create in those countries the exact conditions under
which co-operative methods flourish. Yet, I think that experience has already
shown that a sound plan along these lines could be worked out under proper
supervision and control. It would be a definite step toward the realization
ultimately of financial control and, therefore, independence by the farmers them-
selves, Discounting facilities would have to be provided by some central agency,
either a corporation specially created, as suggested by the President of the
Bank of Commerce, or organized and to some extent, at least, capitalized by
the Government, as in the United States and in France. This would be
absolutely necessary, unless, through the organization of Provincial Savings
Banks, sufficient money could be found, a very doubtful contingency for some
years to come.
One word in conclusion—It ought to be clear to anybody that Canada is
slowly passing through the stage in her agricultural development that the
United States was passing through some years ago, viz., the best lands of the
country have been taken up, wealth accumulating from the rise in land prices
will, in a large measure cease, and land mortgages based on growing prices will
be harder to carry. I have no doubt that competition from the United States
so far as cereals are concerned will grow less and that, in spite of high tariffs,
the United States must buy from us eventually, but competition from a revived
Europe and other parts of the world will increase. If we desire to have Cana-
dian agriculture to maintain its place in world competition in the future, the time
to begin to plan for the rational administration both of its finances and its
scientific development is the present.
Should the Government deem it wise, during the present session of Parlia-
ment, to take action with regard to the establishment of a plan for the develop-
ment of long term and short term credit, I would respectfully urge that an
intensive study of this problem be continued. If it is considered wiser to wait for
further maturity of opinion on the subject, then I would respectfully suggest that,
as the period given for the preparation of this report has hardly been sufficient to
study the problem from the point of view of the communities seeking benefit,
that I be permitted to continue the study of the problem in the interim.
14-15 GEORGE Vv APPENDIX No. A. 1924
WITNESSES
Bill, Mr. Austin,
Reventics Divisions hospOmcerMept WOtawa.........0 cess c+ selene bs te 385-398
Edwards, Mr. George,
Chagiered Accountant, oronto, Ont....... .. Sei eeel cuMoeN bi’ mnie: 3-62, 301-316
Finlayson, Mr. George D.,
Superintendent of Insurance, Department of Finance, Ottawa, Canada. 187-205, 338-343
Neill, Mr. C. E.,
Acting President, Canadian Bankers’ Association, Montreal, Que............ 249-286
Pole, Mr. John W.,
(Chieti Natioualebanks Bxaminens Washington: Cpe wai viiie............- 76-149
Ross, Mr. Henry T.,
Secretary, Canadian Bankers’ Association, Toronto, Ont..............317-338, 384-385
Saunders, Mr. J. C.,
DenutysManisteniofHinamce:@ttawa, @amadtiyy. tHe... 0.0.2.0... ee. 343-383
SUAVE Gon SG Walliams n Humancien, Montreal! Que. ...... 0.66... ee eee 62-74
ory;Dr: HM;
President, Alberta University, Edmonton; Alta......s.2..)..e.0..... 207-249, 286-298
Walliams Wires J) Skelton; Pinanciersthichmond s Va sneer? Peiibo | ee os 149-183
EXHIBITS
No. PaGEs
1. Examiner’s Repcrt on Conditicns of Bank. Fi'ed by Mr. J. W. Pole. Read
IMbOwe videnGens Wi iit homie ages dana) seo Si MOK CIN A Herlonks 8 sed): ty 78
2. Schedule of cans and amcunts loen:ble <bove 10 per cent of Bank’s capital and
SUMP seete Hl aom bie Mites IAW eles. eaC ILO LH WAGED. CE iccccdeup ene cnc bienc oie cues = 80
3. Report of earnings, experses end d.viderds. Filed by Mr. J. W, Pole..........Not printed
4. Abstract of Repcrts of Ccnditions of National Banks No. 142. Filed by Mr.
A Wireeole: siNead IntOWeWiGeNGe (i. ee ee 91
5. Comptroller’s annual report. Dec. 31, 1923. Filed by Mr. J. W. Pole. Read
LINO Eval oni Geian Miya tid: nd piel amanel mente etait eeitatte, ori Ott Hd 9 gaint Rh Fe, 106
6. The Federal Reserve Act, as amended to March 4, 1923. Filed by Mr. J. W.
Jee ibe S R OES RY GES POG SRE EE A ee Se cena cee nec rennN er comer Not printed
7. Chart. Federal Reserve Districts. Filed by Mr. J. S. Williams..............1 Not printed
8
. Comptroller’s Annual Report, Dec. 6, 1920. Filed by Mr. J. S. Williams. Read
IE VAETCR et ee 2 ee ee ek aa ee ee 153
. Comptroller’s Annual Report, Dec. 6, 1915. Filed by Mr. J. 8S. Williams.
iRieadmintoy Hvaicden cers iaruirsy van goeietmy, step tn gai tooo gaa unio aud tie. vim 175
. Comptroller’s Annual Report, Dec. 6, 1915. Filed by Mr. J. S. Williams...... Not printed
. Comptroller’s Annual Report, Dec. 1, 1919. Filed by Mr. J. S. Williams...... Not printed
. Form. Report submitted by National Banks. Filed by Mr. J. S. Williams... .Not printed
e Horm, Appicauntorrediscount. Filed. by Mr J. o. Williams. 9°. 1... . 2. Not printed
. Forms. Examiner’s Report on National Banks. Filed by Mr. J. S. Williams. . Not printed
. Forms, used in connection with Federal Reserve system. Filed by Mr. J. 8.
Wallliairicys pam Pe a ee eee ae ek | Bea ok Stl Paes. ig ee Not printed
16. “The tragedy of artificial ‘Deflation’’’. Filed by Mr. J. S. Williams. Printed
RPM N UME eee bs Tr bec Oe hc, Oe eee, CXXVili
17. Losses by Depositors in Canadian Chartered Banks, 1904 to 1924, filed by Mr.
Geo. Dy Himlsycon: Read intowlividence.” j. Wie yet. ee. 339
18. Memorandum re Guarantee of Bank Deposits filed by Mr. George D. Finlayson.
ex ceinicd evimence sis: | eee) | ORs fee eth. RS 8 ee. 341
19. Application under the Finance Act. Filed by Mr. J. 8. Saunders. Printed
BRE Pence 5 eee eer ee a yn eee. sag. onde. Cxxxil
20. Pledge Agreement under the Finance Act. Filed by Mr. J. S. Saunders.
JP inva itexo vs) yoy oe anNe Bert pae my Mee A a en aa RN aan er CXXX1V
21. Forms, cheques, pass-books, ete., used in connection with Post Office Savings
Banks) satnledsbye Mr eAustine bill 4 tinted # tert alt: AeseuiAy, wrentg Jel to Nok printed
22. “McKeown Report” on Home Bank referred by House. Printed as appendix... xvii
23. “Tory Report” on Agricultural Credit. Referred by House. Printed as appendix xvi
24. The Guaranty of Bank Deposits by W. N. Mitchell. Printed as appendix...... CXXXVIi°
exxvii
CXXViii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
EXHIBIT
(THIs CHART, WITH IMMATERIAL REVISIONS, WAS PRINTED
Th a letter to Senator Overman, December 2nd, 1921, concerning the Extravagance and Mismanagement of the Federal
Teerhee 19, 1921,) John Skelton Williams said: ‘I ask attention to the important fact that not a single one of the many
public interest, to make against the administration of the Reserve System has ever been refuted. They stand today unsh
Compiled from Official Sources
y 5
TLE ACCA Rote AMS “Our Federal Reserve System, A National Bless
‘ormerly
First Assistant Secretary of the Treasury,
Comptroller of the Currency, and Ex-officio member
of the Federal Reserve Board, and Director THE TRAGEDY OF
of the Divisions of Finance and
Purchases of the United
States Railroad
Administration
LIABILITIES OF FAILED BUSINESS HOUSES 1921, $627,401,888—-NEARLY SIX TIMES AS GREAT
(THESE FIGURES ARE EXCLUSIVE OF MANY THOUSANDS OF FARMERS AND
SUICIDES REPORTED IN U.S. FIRST SIX MONTHS 1921, 7,016. SAME PER
The following tables show the average monthly prices of leading AGRICULTURAL, MINING AND MANUFACTUR
of eredits extended by the 12 Reserve Banks for each month for the period from May, 1920. (Figures have been
“Out of Thine own Mouth Will I Judge
THE COLLAPSE IN PRICES OF AGRICULTURAL AND OTHER
ENFORCEMENT OF THE FEDERAL RESERVE BOA
Corn Corton | Sugar Waeat | Carrie Hives Hogs Woo. YELLOW
No.3 | Middling | Granul- No. 2 Steers | Packers Light Ohio Pine
— Chicago N. ated Red Chicago | Heavy | Chicago | Grades fir’ng
Orleans deo Gas Winter Native Ney?
Chicago Steers
1920
JANDARY RC hone sos © 1-47 +403 +1537 +263 15-93 40 15-12 1-23 112-
(For the four months from the end of January, 1920, to the end of May, 1920, the Loans and Discounts and Bought
increase, rather than a decline in commodity prices. Corn at Chicago averaged 1-47 in January and advanced to 1-98
Copper was fairly steady.)
1-98 +403 +2247 2-97 12-60 +35 14-75 1-16 160-
1-83 +403 +2120 2-89 15-03 +34 15-35 1-00 160-
1-53 +395 +1910 2-80 15-38 +29 15-88 -90 160-
(From the end of May to the end of July there was a reduction of about $100,000,000 in the credits by the Federal
slide in prices got under way. As the table shows commodity prices responding to the deflation policies of the Reserve
May averaged -338 in August. Wheat from 2-97 in May to 2-47 in August. Wool from 1-16 in May averaged -87 in August.)
+338 +1490
+270 +1426
2-47 15-35
+28 15-73 +87 | 157-
2-49 15-25
+28 17-06 +83 | 157-
(The aggregate credits extended by the Federal Reserve System after declining for June and July from the May level
and pressure for the payment of loans was actively enforced in other directions and prices continued to fall. Bank deposits
depositors, demands without forcing the collection of loans entailing many bankruptcies. Just at this time, September
Farmers’ Associations and business men throughout the country, and by the Comptroller of the Currency whose protests
protests were of no avail. The figures in this table show that from the end of October, 1920, to the end of August, 1921,
the contraction proceeded prices continued to tumble.)
The PRESSURE exacted was illustrated in the small country national bank (neariy all of its loans to farmers) to
for ee use of $112,000 for two weeks September 15 to October 1, 1920. A part of the excess interest exacted from member
tion be made.
OCHOBER.: j8-4 20 30" +87 208 1078 2-20 14-68 25 14-78 72 152
INOVEMBER \.05 i. 5: 80 178 096 2-05 14-57 23 12-14 69 124
DECEMBER... ‘vty inte : 73 144 080 2-01 12-09 19 9-66 54 124
1921
JANUARY... 65 145 075 1-96 9-84 “16 9-67 54 110
FEeRUARY ee 63 +132 -070 1:91 9-31 +13 9-70 54 95
IMIAR CH. 5) Senos ene “61 “110 07 1-67 9-56 “11 10-30 52 95
AB RIE occ. ere ee 55 abig 072 1:38 8-71 “10 8-85 52 91
A Qa aR ee na a 60 117 063 1-56 8-42 “11 8-45 50 91
JUNE... - oust 60 110 056 1-43 8-09 +18 8-25 49 91
GN ce ete Mere ee cee 60 114 054 1-22 8-40 +13 10-20 49 91
MUTGUS IG hae 5k 55 129 058 1-23 8-77 “14 10-39 49 92
(From May, 1920, to August, 1921—covering exactly the period of the appalling and unprecedented drop in prices of Agricul
FOURTEEN HUNDRED AND TEN MILLION DOLLARS (1,410, 000,000) and coincidentally the country from the
greatest annihilation of property values in the Nation’s history. The baneful effects of the Federal Board’s plans and
October, 1920, has been drastic and continuous.
From January 1, 1920, to September 6, 1921, the total DEPOSITS of the National Banks of the United States shrank from
this period the Federal Reserve Banks, instead of easing the situation by granting accommodations to enable the member
Loans that the contraction or deflation in the credits which had been extended by the 12 Federal Reserve Banks showed,
than 1,400 Million dollars. The member banks having to pay their Depositors and repay the Reserve banks at the same
Between the end of October, 1920, and the end of August, 1921, the amount of Federal Reserve Notes in circulation also shrank
is all the more significant when we realize that a large portion of the Reserve Notes outstanding were issued against gold.
BANKING AND COMMERCE CXxix
APPENDIX No. 1
No. 16
IN THE CoNGRESSIONAL RecorD or FEBRUARY 28, 1922)
Reserve Board, (which, by unanimous consent of the United States Senate, was printed in the Congressional Record on
serious criticisms and charges which it has been my unpleasant duty, in behalf of our Federal Reserve System, and in the
aken and unshakable.”’
EFFECT OF “DEFLATION” ON
ing; Its Mis-Management a Public Calamity” RAILROAD TRAFFIC
Freight traffic on the principal railroads last
year decreased 23-3 per cent. compared with 1920,
ARTIFICIAL “DEFLATION” the greatest decline, relatively and absoiutely,
that the railroads ever experienced in a single year.
Net ton miles total 344,167,000,000 during 1921,
103,390,000,000, less than in 1920.
AS IN 1919 ($113,391,287) AND OVER THREE TIMES AS MUCH AS IN THE PANIC YEAR 1907.
INDIVIDUALS WHO ALSO BECAME BANKRUPT AND RUINED IN THE SAME PERIOD)
IOD LAST YEAR 2,996; INCREASE IN DEATHS BY SUICIDE, SIX MONTHS 4,120.
ING products for the month of January, 1920, and for each month from May, 1920, to August, 1921, inclusive; also the amount
compiled from official monthly issues of the Federal Reserve Bulletin pulbished by the Federal Reserve Board.)
Thee, Thou Wicked Servant.’’—Luke 19:22.
COMMODITIES WAS CONTEMPORANEOUS WITH THE
RDS’S RUINOUS ‘‘DEFLATION” POLICIES.
Corton | LeatHeR| STEEL Correr Leap |Prrroteum] Pic Iron Toray or Att Loans
Yarns Sole Billets Ingot Pig Crude at and Discounts (including ‘‘Bought Paper’)
Boston | hemlock |Bessemer| N.Y. desil- Penna. furnace held by all 12 Federal Reserve banks.
Chicago | Pittsburg verized at, (As officially reported at the end
wells of each month.)
“72 56 48-00 +193 +087 5-06 37-75 $2,736,670,000
Paper held by the 12 Federal Reserve Banks show an increase of about $200,000,000, and coincidentally there was an
in May. Wheat advanced from 2-63 in January to 2-97 in May. Cotton maintained its price. Cotton Yarns advanced;
+76 +57 60-00 +190 +085 6-10 43-25 2,938 031,000
72 57 60-00 +190 +084 6-10 44-00 2,830,979, 000
“70 “57 62-50 +190 +086 6-10 45-75 2,836 ,935,000
Reserve System. Disquieting reports were spread as to the deflation policies of the Reserve System and the downward
Board proceeded to tumble. Corn which had averaged 1-98 in May declined to 1-52 in August. Cotton from -403 in
+63 +55 61-00 +190 +089 6-10 48-10 2,989, 124,000
54 51 58-25 +186 -081 6-10 48-50 3,012,088,000
increased somewhat to the end of October as a result of advances for the crop movement, but the curtailment of credit
were shrinking and the Reserve System failed to extend the aid which would have enabled member banks to meet
and October, 1920, urgent pieas for a change of policies were made to the Reserve Board by Senators, Congressmen,
both to the Secretary of the Treasury and to the Board against the Board’s destructive policies are of record, but all
the DEFLATION OF CREDITS BY THE RESERVE SYSTEM WAS STEADY AND CONTINUOUS and as
which a Federal Reserve Bank actually charged interest as high as 873 per cent—average about 45 per cent. per annum,
banks was refunded after Mr. Williams in letters and public addresses had demanded of the Reserve Board that restitu-
+43 49 55-00 +167 +073 6-10 43-75 3,099,672, 000
+36 47 49-70 +145 +062 6-10 36-50 2,983,103, 000
31 “41 43-50 +136 -047 6-10 33-00 2,974,836, 000
+28 40 43-50 128 +049 5-77 30-00 2,622,174,000
27 38 42-25 128 +046 4-18 27-50 2,560,013,000
24 37 38-40 122 040 3-00 24-20 2,356, 160,000
23 37 37-50 124 +042 3-18 22-87 2,180,178 ,000
24 37 37-00 128 049 3°35 22-00 1,995,051,000
25 37 37-00 128 +045 2-65 20-75 1,782,951,000
24 35 32-25 125 044 2-25 19-37 1,661,036,000
25 34 29-60 117 044 2-25 18-20 1,527,255,000
tural products—the actual ‘‘contraction” or ‘‘deflation’’ of regional Reserve Bank credits amounted to the huge sum of
Ocean to Ocean, and from Canada to the Gulf and the Mexican Border experienced the most ‘‘crushing losses’’ and the
policies were seen and felt even before the aggregate of its Loans and Discounts began to show the shrinkage which, since
17,866 Million dollars to 14,561 Million dollars—the total loss in Deposits for this period being 3,305 million dollars. During
banks to meet these unprecedented demands upon them, exerted such pressure in requiring them to pay-up or curtail their
from the end of May, 1920, to the first of September, 1921, the colossal and destructive contraction as above stated, of more
time, called in loans right and left, causing an unprecedented collapse in values and widespread ruin.
from $3,351,000,000 to $2,481,000,000, a CONTRACTION of $870,000,000. This contraction in the circulating currency
GOLD RETIRED FROM CIRCULATION and NOT against commercial credits with only the statutory percentage of
1—9
CXXX SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
SuMMARY
Total Loans and Discounts and ‘‘Bought Paper” held by all 12 Federal Reserve Banks, May 28, 1920...... $ 2,938,031,000
Total Loans and Discounts and ‘‘Bought Paper” held by al] 12 Federal Reserve Banks, August 31, 1921...
Total Loans and Discounts and ‘‘Bought Paper’’ held by all 12 Federal Reserve Banks, January 25, 1922..
1,527, 255.000
932,882,000
Actual CONTRACTION in credits extended by the Federal Reserve System, May 28, 1920 to August 31, 1921 1,410,776 000
“ “
May 28, 1920 to January 25, 1922 2,005, 149,000
which means that the credits which were being extended by all Federal Reserve Banks on August 31, 1921 amounted to only
52% of the amount outstanding May 28, 1920, and on January 25, 1922, the amount of credits outstanding was only 32% of
the figures for May 28, 1920.
AVERAGE price for the 16 leading products, shown in the above table for the month of May, 1920, was..........
AVERAGE price for the 16 leading products, shown in the above table for the month of August, 1921, was........
NOTWITHSTANDING THESE FACTS CERTAIN OFFICIALS OF THE RESERVE SYSTEM ARE DISSEM-
JNATING PROPAGANDA ALLEGING DIRECTLY CONTRARY TO THE RECORD, THAT “ DURING
THE WHOLE PERIOD OF FALLING PRICES THE FEDERAL RESERVE BOARD WERE SUPPLYING
LARGELY INCREASED CREDIT FACILITIES AND ISSUING A CONSTANTLY INCREASING VOL-
UME OF FEDERAL RESERVE NOTES”
Views or Leapina MEN At Home anp ABROAD
The paralyzing and destructive deflation policies of
the Federal Reserve Board which have been so world-
wide in their effects contrast most vividly with the views
of the ablest and best thinkers and leaders of our own and
other countries.
The following extracts from the expressed opinions of.
eminent authorities are merely examples of countless others:
HON. REGINALD McKENNA, of England, formerly
Chancellor of the Exchequer, now President of the London
Joint City and Midland Bank, the largest bank in the world:
“T think I have said enough to show that an attempt at
monetary deflation of this kind can only end in the strangu-
lation of business and widespread unemployment. -
“The consequences of a continuous fall in prices entailed
by dear money and restriction of credit, and accentuated by
heavy taxation, must be complete stagnation of business .’’ *
SIR EDWARD HOLDEN, late President of the Lon-
don Joint City and Midland Bank:
The President of the British Banking Reform League in
referring to an address delivered several years ago by Sir
Edward Holden on the ‘‘Depreciation of Securities in Rela-
tion to Gold,” said.
“In that illuminating address Sir Edward showed con-
clusively that the maximum amount of trade which is pos-
sible depended upon the volume of bank loans allowed, and
that the extent to which loans could be granted depended not
upon the demands of trade, nor upon the amount of securities
offered, but upon the amount of legal-tender reserves con-
trolled by the banks.”
LORD LEVERHULME, probably the greatest indus-
trial leader in the British Empire:
“The process of too rapid deflation is undoubtedly the
cause of the present unemployment and trade stagnation.
“The prices of commodities rose to the extreme limit
during the war, and their reduction was a prime necessity,
but the fall has been too sudden for adjustment. This
deflation has been accomplished through the banks calling
in loans which were used to finance stocks at high prices,
and the effect of the forced realization of these stocks has
been to drive down price of commodities below the cost
of production.”
(Of Lord Leverhulme, a distinguished English writer in
his well-known book, ‘‘The Mirrors of Downing Street,”
says: ‘‘I suppose that nobody will now dispute that Lord
Leverhulme is easily the foremost industrialist, not
merely in the British Isles; but in the world. I can think
of no one who approaches him in the creative faculty.
Not even America, the country of big men and big business,
has produced a man of this truly colossal statue.’’)
THE PRESIDENT OF THE BRITISH BANKING
REFORM LEAGUE, Mr. Arthur Kitson, in acknowledging
receipt of one of John Skelton Williams’ addresses on the
deflatation policies of the Federal Reserve Board which had
been sent him by request, said in his letter to Mr. Williams:
“T agree with all that you have written. We have been
experiencing the same troubles in this country that you have
had inthe United States, and from identically the same
cause. Our treasury officials under the influence of the
big money lenders undertook to deflate our currency. * *
“The public stopped buying, business collapsed, firms
closed their doors, and we have at the present time the
greatest roll of unemployed that we have ever had since the
‘hungry forties." * *
The same well-known authority in an address published
in 1920, said:
“The contraction which followed the Napoleonic wars
when our statesmen destroyed the ‘cheap ’ money which had
enabled Great Britain to carry on industries during the long
war period from 1797 to 1815, and substituted the costly and
inadequate gold basis brought about the great fall in prices
and that era of business depression which gave rise to the
corn law agitation resulting in the Chartist riots and the
raise of the free trade movement.
“Neither free traders nor tariff reformers seem to have
understood that that period of social misery was directly
ease to the Government’s contraction of the money
supplies.
MORETON FREWEN, eminent English economist and
publicist, a year ago, in discussing the world crisis:
‘What, then, are the common denominators which best
account for the universality of that disaster now impending
over the New Year? I have pointed out one, namely, the
deflation ot credits and currencies. It is enough to say that
if this intentional and malevolent destruction of credit is
followed to its logical conclusions men’s hearts may well fail
them everywhere for the days that are at hand.’’
The GOVERNOR OF THE BANK OF FRANCE,
properly regarded as one of the world’s most eminent bank-
ing authorities, in his annual report a year ago, declared:
‘‘We have welcomed, whether by means of rediscount or
by direct discount, all paper whose creation responded to the
legitimate needs of commerce and production. By this
liberal policy, to which we have remained and always will
remain faithful, we expect to support with all our power the
activities of widely varying business enterprises which in
France are needed to lessen the violence of the crisis:”’
PROFESSOR GUSTAV CASSEL, an economist of
international reputation, in his recent report submitted to
the League of Nations:
_‘The downward movement of prices has not, as is some-
times assumed, been merely a spontaneous result of forces
beyond our control. It is essentially the result of a policy
deliberately framed with a view to bringing down prices
and giving a higher value to the monetary unit. * *
“The world’s work has been brought to a standstill to a
degree that we have never witnessed before, and unemploy-
ment has risen to alarming figures, particularly in countries
Te the policy of deflation has been applied most sever-
ely.”
BANKING AND COMMERCE
APPENDIX No. 1
PROFESSOR J. LAURENCE LAUGHLIN, Professor
gous of the School of Political Economy, University of
cago:
“A crisis comes because credit has been unduly expanded
in a period of prolonged prosperity; in an optimistic spirit
men have entered into transactions beyond their actual
means, as is shown when the test of actual payment is exact-
ed, and in a time of fright collateral as well as goods falls
in price. IN SUCH A SITUATION LIQUIDATION
NEEDS TIME IF DISASTER IS TO BE PRE-
VENTED.”
‘“* * the great need is some means—whatever it
may be—which will enable a bank to make loans to a client,
who can thereby be saved from failure and from hasty and ruinous
liquidation.
PROFESSOR IRVING FISHER, Professor of Political
Economy, Yale University:
The newspapers of January 31st, 1922, in dispatches from
London quote Prof. Fisher, as pointing out in an address
before the London School of Economics, at the London
University, that the fundamental cause of the collapse in
rices in this country was the abrupt way in which the
Federal Reserve System raised discount rates under the
“false idea that they must get back the so-called normal
of pre-war.’’ Continuing the press dispatch quoting,
Professor Fisher says:
“The idea of suddenly wrenching: back price levels when
they had reached the heights of 1920 to 1913 level, whilst it
did bring about justice to contract parties who had entered
into contracts before 1913 proasiied a frightful injustice to
the much larger number who had contracted at these high
price levels.””
“Conseguently,’”’ says the dispatch quoted, ‘‘Professor
Fisher held it to have been a very great mistake of policy of
the Federal Reserve Board to have raised the rates of dis-
count so high and to have produced this fall of prices.’’
The late A. BARTON HEPBURN, a leading financier
of New York, and former Comptroller of the Currency,
upon his return last summer froma visit to the Far East was
quoted by the Associated Press as follows:
CXXXi
“Japan is backing up the banks in lending funds at a low
rate of interest to struggling farmers who would otherwise
go under to the detriment of commercial life.’’
Contrast the intelligent poiicy of the Banks of Japan
with the Federal Reserve which for example, in Colorado,
Mississippi and Alabama charged in some cases 22 per cent.
and 31 per cent. and in one instance as high as 87} per cent.,
to member banks whose loans were mainly to farmers.
JAPAN. A newspaper published in TOKYO, JAPAN,
in April, 1921, discussing trade between the United States
and China referred to an instance of machinery purchased by
a Cnee firm on a four months’ sight draft, said signifi-
cantly:
“WHEN THE FEDERAL RESERVE BOARD
CALLED IN CREDITS, the firm was told that they
would have to pay cash on delivery. This almost threw
them into bankruptcy.’’ The newspaper pertinently adds:
“The Chinese memory is a long one.”
Views of UNITED STATES SENATORS AND
REPRESENTATIVES.
The Joint Commission on Agricultural Inquiry, com-
posed of prominent Senators and Representatives of both
political parties, says in its report recently submitted to
Congress.
“The debacle of prices in 1920 and 1921 reduced the
farmer to a condition worse than he has suffered under for
30 years. * * Farmers are having the greatest diffi-
culty in paying the debts incurred in producing the crops
of 1920 and in Securing credit necessary for new production.
The Commission believes that these difficulties are due
in a measure to the credit restrictions and limitations
of the past 18 months and in part to the fact that the banking
machinery of the country is not adequately adapted to the
farmers’ requirements. * * The Commission is of the
opinion that a more liberal policy could have been adopted
in the latter part of 1920 and the early part of 1921, and that
the adoption of such a policy would have served to arrest in
part the tide of deflation and to reduce the hardships and losses
incident thereto.””
RESERVE BOARD DEAF TO REPEATED WARNINGS. October 18, 1920, the Reserve Board was warned by
John Skelton Williams, then Comptroller of the Currency, and ex-officio member of the Board in the following language:
“The plans and policies which have aided in bringing about deflation in the great staple commodities should be at once
taken up for consideration and revised as far as may be necessary to meet present and changed conditions. If this is not done
speedily, I am fearful as to the consequences which may ensue.’’ Three days later, October 21, 1920, in a letter to Secre-
tary of the Treasury Houston, Mr. Williams said: ‘‘The strain upon the business fabric of the country is, in some respects,
unparalleled and I do feel that the time has come for the exercise of such salutary and constructive powers as may be at our
command, * * Thesituation * * has become more aggravated of late, and unless relief can be found an increase im
bank failures, I believe, will be inevitable.’’
The Board’s answer to these and other warnings was, more pressure and deflation—the reduction in ‘‘credits’’ by the
Federal Reserve Banks for the 12 months ensuing from October 15, 1920, to October 26, 1921, was more than $1,722,000,000,.
every month showing acontraction. The actual contraction in Federal Reserve Notes in circulation same 12 months period,
was $944,492,000. The shrinkage and annihilation of property values which accompanied this ‘‘deflation”’ of credits exeeeds.
the wealth of empires. The worlds history furnishes no parallel for the heart-rending wiping out of values and destruction:
of enterprises, homes and fortunes, large and small, which we have witnessed in the past 18 or 20 months, while the Reserve-
Board was conducting its fatal experiments.
Mr. Williams kept up his efforts to secure a reversal of the Board’s destructi:ve policies but his remonstrances were
unavailing. Ina letter to the Reserve Board Governor, January 17, 1921, he said ‘‘It is entirely true that I wish to go om
record. * *—I wish to be recorded definitely as having done my utmost to urge our Board to saving or palliative accion and
consideration for the troubles of the public and thereby at least free myself from the censure that will fall on us with crugh-
ing force if we omit any possible effort to micigace present and real suffering or to avert disaster; alchough the consideration
of personal exculpation is, of course, slight and negligible in comparison with my main purpose and hope, which are to obtain
from the Board some prompt and effective action for relief.”’
‘CXXX1i SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
EXHIBIT No. 19
APPLICATION BY
under the Finance Act, 1923.
To THE HonourRABLE
Tur MEMBERS OF THE TREASURY BoARD:
The Bank (hereafter
called “ the Bank’) hereby applies under the provisions of the Finance Act,
4923, for a loan of dollars or such less amount as may be
approved by the Treasury Board and offers as security therefor the securities set
forth in the Schedule attached hereto.
The Bank will repay the amount advanced with interest at the rate of......
per cent per annum on or before the first of May 19....
The Bank submits herewith (or undertakes to furnish as soon as possible
as the case may be) a certified copy of a resolution of the Board of Directors
of the Bank authorizing this application and the pledge of the securities specified.
The Bank will upon approval of the loan deposit the securities with the
Minister of Finance or for his account with a depository authorized by him
to receive the same accompanied by a duly executed pledge agreement in the
form approved by the Treasury Board.
Dated this day of 19
The Bank
President (or Vice-president or other Director
authorized by resolution of the Board).
General Manager or other officer authorized
by resolution of the Board).
Approved for an advance
of $
Secretary of the Treasury Board.
Ottawa,
BANKING AND COMMERCE CXXX1i1
APPENDIX No. 1
THE FINANCE ACT, 1923
ScHEDULE giving description and brief particulars of securities to be deposited pursuant to
attached application by the Bank
Valuation by Treasury
DESCRIPTION AND ParTICULARS Bank’s valuation Board as basis
for advance
The Bank
President (or Vice-President or other Director
authorized by the Board).
General Manager (or other officer authorized
by the Board).
CXXXiV SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
BP BV ORME IO 20)
PiepGcE AGREEMENT
under the Finance Act, 1923.
The undersigned Bank hereby acknowledges to owe to His Majesty the
King, the sum of dollars
together with interest at the rate of.......... per cent per annum, which amount
is to be paid to His Majesty the King on or before the 1st day of May, 19....
As security for the payment of the said indebtedness and interest the under-
signed Bank has concurrently with the execution hereof deposited with the Min-
ister of Finance (or with for account
of the Minister of Finance) in trust for His Majesty the securities set forth in
Schedule “A” hereto annexed, and hereby assigns and transfers the same to
His Majesty as such security aforesaid.
The regulations, terms and conditions of pledge, set forth in the Schedule
“B” hereto together with all additions to and modifications thereof from time
to time made by the Treasury Board shall form part hereof and the under-
signed Bank agrees to be bound thereby and from time to time to execute all
such further instruments and documents as may be reasonably required by the
Minister of Finance for the purpose of giving effect thereto.
Executed this day of 19
The Bank
President (or Vice-President or other
authorized Director).
ae aes 6 Sie oe a0 «0.0 fee) € eS el aieie aise
authorized by resolution of the Board).
SCHEDULE A.
Tue Finance Act, 1923.
Schedule giving description and brief particulars
of securities pledged and subject to the
attached agreement.
Description and Particulars.
Presiding (or Vice-President or other
Director authorized by the Board).
General Manager (or other officer
authorized by the Board).
BANKING AND COMMERCE CXXxXV
APPENDIX No. 1
SCHEDULE B.
REGULATIONS, TERMS AND ConDITIONS APPLICABLE TO ALL ADVANCES TO CHARTERED
Banks OF CANADA UNDER THE Finance Act, 1923.
Ps Advances shall bear interest from the date on which they are respectively
made.
2. Interest shall be computed at the rate of five per cent per annum or
such greater rate as may from time to time be fixed by the Treasury Board.
3. Interest shall be payable quarterly on the last day of the months of
February, May, August and November, the first payment to be made on the
first of such days which shall happen after the making of each advance.
4. Advances may be made at the office of the Receiver-General of Canada
at Ottawa, or at the office of any Assistant Receiver-General. All payments
shall be due at the office at which the advance was made.
5. So long as the Bank is not in default it shall be entitled upon request to
receive all interest and dividends which shall be paid upon the pedged securities
or the coupons or other interest warrants therefor.
6. The Bank shall at all times maintain such margin in value of pledged
securities over and above the advances thereon as may be required by the
Treasury Board.
7. As advances are repaid the Minister may direct the redelivery to the
Bank of such securities as he may approve.
8. All advances shall be repayable on or before the Ist day of May in
each year.
9. If the Bank shall make default in payment of the advances when due
- or meanwhile in the payment of interest, or in the maintenance of margin, or shall
suspend payment of its liabilities, the whole amount of the indebtedness and
interest shall, without any notice or demand, become immediately payable and
the Minister or his appointee may forthwith, or at any time thereafter in his
discretion without notice, without demand, without advertisement or any other
formality, all of which are hereby waived, sell and dispose of all or any of the
pledged securities by public or private sale or on any exchange in Canada or
elsewhere and may buy in at any sale by auction and vary or rescind any con-
tract of sale and may transfer and deliver the securities so sold to the pur-
chasers thereof.
10. The Bank shall take up all maturing securities on or before the maturity
thereof either by paying the amount required to obtain the release thereof or
by the substitution of other approved securities of a like principal amount, or
partly in one mode and partly in the other.
11. No obligation to collect either principal or to enforce or realize upon
any of the pledged securities shall rest upon His Majesty, or the Minister or any
depository, and the duty of giving notice of dishonour of or protesting any
security shall remain with the Bank. His Majesty or any person on his behalf
may, however, exercise without responsibility for loss or otherwise all or any of
the rights and remedies of a holder of such securities.
12. All moneys realized from the pledged securities after deducting all
expenses, commissions and costs, including Solicitor and Counsel fees in con-
nection therewith, shall be applied on the indebtedness of the Bank to His
Majesty, and any surplus shall be paid to the Bank. All accounts certified to be
correct by the Department of Finance shall be conclusive.
13. Notwithstanding the pledge of securities His Majesty, shall in respect
of the indebtedness and interest, be entitled to all other rights and remedies
against the Bank vested in him by law, and shall not be obliged to realize upon
the pledged securities or any of them.
CXXXV1 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
14. His Majesty shall not be responsible for the loss of any of the pledged
securities while in transit to or from the Department of Finance or the office
of an Assistant Receiver-General.
15. “ Minister” shall mean the Minister or Acting Minister of Finance, or
any Deputy or Assistant Deputy Minister or any appointee of the Minister or
Acting Minister. ‘‘ Bank” shall mean the pledging Bank.
16. For the purpose of uniformity it is declared that the Agreement of
Pledge and the rights and obligations of His Majesty and the Bank respectively
thereunder and under these regulations shall be interpreted and governed by the
law of the Province of Ontario.
17, These regulations and the terms and conditions affecting the deposit of
securities and the agreement of pledge thereof may from time to time be added
to, varied or modified by the Treasury Board, and all such additions, variations
and modifications shall apply to all agreements of pledge then existing, as well as
to those thereafter entered into with the same effect as if embodied therein.
18. Whenever documents of title covering grain or other commodities are
released under the provisions of Section 4 of the Act, the Bank shall be required
to execute a declaration of trust in the following form:—
“Whereas the Minister of Finance, under the authority of the Finance
Aet, 1923, has advanced t6” the Banke)", O97, SV P88 on 72% through its
Bisa gt tiia ss 0 vas cs thé gum of... 0:22... 5) oe dollars
(S. RPS ieeoT 262 109 ) upon the pledge of the following securities, that
is to say:—(a)
((a) Here insert descrip-
tion and amount of
each promissory note
or bill of exchange
and the relative do-
cuments of title.
And whereas the Minister, under the authority of Section 4 of the said Act,
has permitted the bills of lading and other documents of title covering the grain
and/or other commodities underlying the above mentioned securities to go
forward under the control of the Bank with the said grain aud/or other com-
modities;
te sand amie ee ee er ee hereby acknowledges receipt of the said
bills of lading and other documents of title.
RhessaiduBankods .eleide. ob haeiepwes receives the above as trustee for the
Minister under the provisions of the said Act.
We esa) Ge sag ce further undertakes to keep this trans-
action separate from any others and to remit to the Minister the entire net pro-
ceeds when realized or a portion thereof sufficient to pay off the amount of the
advances above mentioned and the interest thereon unless the said advances
and interest have sooner been paid off.
The said Bank undertakes to cover the grain and/or other commodities by.
insurance against loss by accident, fire, or otherwise and to hold the policy or
policies on behalf of the Minister.
Dated). A006). 401 10 eeagdanal,
Bank],ed.eds euiqivectmeiues.. viaebele
Crd, © 6, SL © 0f0 68 (eda Ss he im 6 w eesepplecedaieid.0e. 0.0, bie cha
Manage
BANKING AND COMMERCE CXXXV11
APPENDIX No. 1
EXHIBIT No. 24
“The Guaranty of Bank Deposits. Submitted as Term Paper in
“ Advanced Banking,” Pol. Econ. 31 Spring Quarter, 1924, University of
Chicago.” -
OREWORD
The guaranty of bank deposits as it has developed in our middle west has
been a very interesting experiment. While its early sponsors eagerly siezed upon
it as political issue, it secured widespread approval no doubt, because it was
popularly thought to be the proper corrective of a real evil, seemingly insepar-
able from free banking under frontier conditions. If there has been misconcep-
tion and no lack of self interest on the part of the advocates, neither has the
opposition been free from bias and self interest. Much of the bibliography of
the question reflects this clash of interests.
In this paper it has been our aim to set down the main points much as one
might describe an experiment being conducted under laboratory conditions.
For this reason some time is devoted in the beginning, to a discussion of what
seem to be the most significant of the theoretical aspects of the study before
proceeding to describe the actual working out of the experiment itself and the
conclusions which may be drawn therefrom. No attempt has been made in the
text to indicate completely the exact sources of all the materials presented. All
the bibliographical references listed at the end of the study have been drawn
on freely, the magazine articles referred to, being of particular value with respect
to the recent seemingly conclusive developments.
W. N. MITCHELL.
June 2, 1924.
CoNCLUSIONS
The conclusions which now must seem inevitable are that this scheme
which had such a short time ago apparently earned an honourable place in
State banking practise, is a dismal failure. Thus there at once arises the ques-
tion as to what are the causes of this sudden reversal of aspect. Must it be
concluded that the proposition is unsound in principle; that it is unnecessary
and must inevitably lead to bad banking and therefore should be abandoned?
Or must we look for the cause of the failure in the shortcomings of the laws
themselves? Undoubtedly there are many interested observers, long opposed
to the idea on principle, who are glad now to assume an “I told you so”
attitude and dismiss the case without further ado. On the other hand one
cannot examine the provisions of the various laws and follow their course as an
administrative policy was being developed without being impressed by the fact
that in time of stress the assurance of protection held out was a very unstable
one, and one might well wish that it might have been possible to frame the
legislation in such a manner that the proposal could have had a fairer trial.
The tempering of politicians has not been an unknown danger and came very
near wrecking the plan in the course of its history but this was not directly
responsible for the failure in the end. The overwhelming effect of an unpre-
cedented epidemic of bank failures broke the system which is not strange of
course for if there was a weakness it must show itself in a time of particular
stress. The point is, the laws did not provide against such a catastrophe and
ignored the possibility of what in fire insurance is called the conflagration
hazard. Neither would the result probably have been different if the supreme
test had been postponed until time had been given to more firmly establish the
plans. The oldest and presumably best established systems were among the
first to collapse. The fact that none of the laws provided for an accumulating
reserve fund based on a scientifically computed “mortality” table but rather
CXXXViil SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
relied upon hand to mouth assessments, made the age element of little impor-
tance in determining the relative strength of the plan. It is true that more
stringent supervision which invariably developed with experience with the
plan in the several states tended to raise the standard of the individual risk.
There is some evidence tending to show that this might have been the case and
even that much more rigid observation of banks and bankers should have been
the rule. The mortality among national banks with much stricter supervision,
was very much less though this is to be partly explained on the grounds that
the national banks are by legal requirement comparatively large institutions
and it is to be expected that the mortality should be higher among the smaller
banks. Inadequate inspection must no doubt assume a part of the blame, but
the real cause it would seem, lies in the fact that every one of the laws in some
way or another violate the principles of scientific insurance and must have been
doomed to failure in a time of supreme test.
The Lessons to be Drawn from the Failure:
The causes as just stated suggest the lessons which may be drawn from the
experiment. The insurance contemplated by the laws has been based on much
the same principle as that involved in the country mutual fire insurance com-
panies. These make assessments against the subscribing farmer in proportion
to the valuation of his insured property, in sufficient amount to cover actual
losses of members in the association and no reserve fund is built up. This
works very well in a farm community where no conflagration risk exists. But
if the risks of such a company were all situated in a single village where such
risks are present, the probability would be that the system would be wrecked
sooner or later. In banking, especially when considered in a local sense as in
a state having a high degree of economic unity, the ‘conflagration hazard”
cannot be eliminated. Bank failures occur for the most part, in times of de-
pression and in such times, failure is likely to become a veritable epidemic.
For such times, mutual assessment insurance with no provision for the accumu-
lation of reserves, provides no protecton. The results of the last few years
serve but to reiterate the minimum requirements of scientific insurance as de-
fined earlier in this report. With any less than these conditions, the plan has
small hope for permanent success in times of stress.
The Probable Future of Bank Deposit Guaranty.
One can but conjecture what the probable future of this interesting experi-
ment which seemingly has failed so dismally, will be. That a practical plan of
guaranty of deposits could be worked out for the country as a whole, there
is little reason to doubt. That there is no probability of such action bringing
all banks under a guaranty plan throughout the nation is equally certain.
Nothing short of an upheaval of concerted popular approval could bring about
the unity of action necessary under our peculiar dual system of state and
national banking, to secure such a result. It is equally sure that none of the
plans developed in the various states is adequate to meet such a need if it
exists. Of course such crystalization of public opinion throughout the nation
upon some vital question has upon occasion been secured. Undoubtedly such
will occur again and if the benefits to be secured by the guaranty of bank
deposits, in the long run exceed the cost and the need ever seemed impressive
enough, conceivably this might sometime be made such an issue. There is
good reason for believing however, that the need for such a plan will impress
itself less upon the public consciousness as banking standards are raised through
increasingly rigid public inspection and control. In this direction, it is believed,
lies the best means of protecting the public interest and with such control the
demand for deposit guaranty, born of frontier conditions, will likely disappear.
14-15 GEORGE V APPENDIX No. 1 A. 1924
iL,
12.
BIBLIOGRAPHY
. Revell, Alexander Hamilton, 1908.
Outline of a plan of guaranty and a discussion from the point of view
of depositor, business man and public. (Strongly partisan.)
Crerar, 332.1Q800.
. Frame, Andrew Jay, 1908.
Address at State Bankers’ Association meeting in Iowa. (Arguments
against guaranty.)
Crerar, 332.1Q803.
. Laughlin, James Laurence, 1908.’
Address before States Bankers’ Association at Lincoln, Nebraska.
UL of C)"HGIS8IL3.
. University of Oklahoma Extension Division, 1908.
Guaranty of Bank Deposits. Arguments for and against.
Crerar, 051041, v. 16.
. University of Wisconsin Extension Division, 1908.
Government insurance of bank deposits. Reprint of articles by Revell,
Hoch, Forgan, Laughlin, Zimmerman and others collected by the
Department of Debating and Public Speaking.
Crerar, 332.1Q802; U. of C., HGI782U5W6.
. Herrick, Myron T., 1908.
Address before the Ohio General Assembly in reply to a speech by
W. J. Bryan favouring the guaranty of bank deposits.
Crerar, 332.1Q808.
. Shibley, George Henry, 1914.
History of the Guaranty of Bank Deposits.
Crerar, 332.1R.400; U of C., HG17821/585.
. Dickinson, Zenas Clark, 1914.
Bank Deposit Guaranty in Nebraska. Historical and critical study
published by the University of Nebraska History and Political
Science Department.
U. of C., JK2430N3 No. 6.
. Robb, Thomas Bruce, 1921.
Guaranty of Bank Deposits. Prize essay, Hart Schafner and Marx
Prize in Economics. A critical survey of the results attained in
the various states with an impartial estimate of benefits and dis-
advantages.
Crerar, 332.1S004; U. of C., HGI781R66.
. Commercial West, p. 4-5, February 24, 1923.
Bank Deposit Law in Nebraska. (Paying losses of failed banks will
cost solvent banks 25 per cent of their capital.)
Smith, T. H., Chicago Banker, p. 9-10, March 38, 1923.
Guaranty of Bank Deposits in Minnesota.
American Bankers’ Association Journal, April 1923.
Deposit Guaranty in Washington State.
CXXXI1X
cxl SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
13. Cooke, Thornton, Quarterly Journal of Economics, November, 1923.
Collapse of Guaranty of Bank Deposits in Oklahoma. Mr. Cooke
has been one of the closest students of the movement and has
contributed articles of interest concerning it which have appeared
on several occasions during the past ten years in the Quarterly
Journal of Economics.
14. Hodap, R. G., Mountain States Banker, p. 23-4, March, 1923.
Guaranty Bank Law.
15. Commercial West, p. 18, January 20, 1923.
Survey of Guaranty of Bank Deposit Laws.
16. Reports of the Comptroller of Currency.
Particularly that of 1921.
17. Garret, Saturday Evening Post. Issues for March, 1924.
Popular articles on the banking conditions in the Northwest.
14-15 GEORGE V APPENDIX No. 1 A. 1924
MINUTES OF PROCEEDINGS
House or Commons,
CoMMITTEE Room 429,
Fripay, May 2, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Mitchell, presided.
Present: Messieurs Baxter, Benoit, Black (Halifax), Black (Yukon),
Cahill, Caldwell, Carmichael, Clark, Coote, Descoteaux, Drayton, Garland
(Bow River), Good, Grimmer, Hanson, Healy, Irvine, McTaggart, Millar,
Mitchell, Papineau, Robb, Ryckman, St. Pére, Sales, Senn, Shaw, Speakman,
Spencer, Steedsman, Stevens, Tobin, Vien—33.
After the consideration of Private Bills on the Order Paper—
The Chairman read the Home Bank Order of Reference, as follows:—
Monpay, March 31, 1924.
sre Ordered,—That the Resolution adopted by this House on Thursday, 27th March, as
ollows :—
“That in the opinion of this House, in view of the failure of the Home Bank and of
the fact that official prosecutions and inquiries have been instituted, including the Roval
Commission which has been appointed to investigate the facts alleged in the petition
represented by the depositors of the Bank and the affairs of the Bank generally; and con-
sidering that the evidence received and to be taken before the several tribunals will be
available for consideration, the Select Standing Committee on Banking and Commerce
should be instructed to consider the provisions of the Bank Act with a view to recom-
mending such amendments to the Act as will better protect the interests of depositors
generally and will prevent similar occurrences in the future; and also to consider the report
of the Royal Commission in its bearing upon these matters and with respect to the pos-
sibility of saving the Home Bank depositors from loss,” be referred to the Select Standing
Sea on Banking and Commerce for such action as the Committee may deem
advisable.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
A sub-committee, consisting of Messrs Good, Cahill, Baxter, Irvine, Vien
and Mitchell, were appointed to consider and report to the Committee as to
witnesses re Home Bank reference, with leave to report from time to time.
The Committee adjourned to meet at the call of the Chair.
WALTER TODD,
Chief Clerk of Committees.
exli
exhii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
House or Commons,
ComMMiITTEE Room 436,
Wednesday, May 7, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Mitchell, presided.
Present: Messieurs Baxter, Black (Halifax), Carmichael, Carruthers,
Casgrain, Clark, Duncan, Elliott (Dundas), Good, Guthrie, Harris, Healy,
Irvine, Macphail, McMaster, Maybee, Millar, Mitchell, Robitaille, St. Peére,
Sales, Shaw, Steedsman, Stevens, Tobin and Vien.—26.
After the consideration of Private Bills on the Order Paper—
The sub-committee on witnesses reported progress and asked for leave to
sit again.
Report adopted.
The Committee adjourned to meet at 11 a.m. on Thursday, May 8th, 1924.
WALTER TODD,
Chief Clerk of Committees.
Housse or Commons,
CoMMiITTEE Room 436,
Thursday, May 8, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Mitchell, presided.
Present: Messieurs Benoit, Carmichael, Carruthers, Clark, Coote, Desco-
teaux, Garland (Bow River), Good, Grimmer, Harris, Healy, Hodgins, Hudson,
Irvine, Jacobs, Kellner, King (Huron), Ladner, Maclean (York), Macphail,
McKay, McMaster, McQuarrie, Maybee, Mitchell, Ryckman, Spencer, Stevens,
Tobin, Vien, Woods, Woodsworth.—322.
Mr. Vien, for Mr. Cahill, read the second report of the sub-committee, as
follows :—
REPORT OF THE SUB-COMMITTEE ON BANKING AND COMMERCE
Your sub-committee under the Chairmanship of Mr. Frank S. Cahill,
M.P., and composed of the Honourable Walter Mitchell, the Honourable J.
B. M. Baxter, Messrs. W. C. Good, William Irvine and Thomas Vien have
studied the question of witnesses to be summoned in respect of the subject
matter referred to them by the Standing Committee on Banking and Com-
merce. They have limited themselves to the subject of bank inspection.
The following names have been suggested:
1. Mr, John S. Williams, formerly comptroller of Currency at Washing-
ton, D.C., now of Richmond, Virginia.
2. Mr. Lawrence O. Murray also formerly comptroller of Currency, whose
address is presently unknown to us.
ee 3. Mr. W. P. Malburn, American Exchange National Bank, New York
ity.
4. Mr. E. W. Stearns in the office of the comptroller of Currency, Wash-
ington, D.C.
5. Mr. Charles A. McLean, Vice-President Ladd & Tilton National Bank.
Portland, Ore.
BANKING AND COMMERCE exliii
APPENDIX No. 1
6. Sir William E. Stavert, of Montreal.
7. Mr. G. D. Finlayson, Superintendent of Insurance, Department of
Finance, Ottawa.
Mr. Good was instructed by the sub-committee to inquire personally
from these gentlemen whether they would be willing to give evidence if the
Committee on Banking and Commerce desired their presence.
The sub-committee also instructed the secretary, Mr. Todd, to see to it
that a wire be sent to the Secretary of the Treasury at Washington, drafted as
follows:
“To the Secretary of Treasury,
Washington, D.C.
The House of Commons’ Banking Committee are considering advis-
ability of adopting a system of Government Inspection of banks and
desire expert evidence re your own system stop. Can you kindly sug-
gest names of men well qualified to give full information. The follow-
ing names have been suggested John S. Williams, Lawrence .O. Murray,
ex-comptroller of Currency, W. P. Malburn of the American Exchange
National Bank, New York City, F. W. Stearns of the Comptroller’
office stop. Kindly wire reply collect.
(Sgd.) W. G. MITCHELL.
The sub-committee begs to recommend that Sir William E. Stavert, of
Montreal, and Mr. G. D. Finlayson be requested to appear on the question of
inspection.
Your sub-committee further recommends that your Committee decide first
other subjects of investigation before they be requested to suggest other names.
FRANK §S. CAHILL,
Chairman of Sub-Committee
On motion of Mr. Vien the report of the sub-committee was adopted as
read.
Mr. Vien, for Mr. Cahill, read copies of telegrams sent by the Secretary,
Mr. Todd and by Mr. Good, as instructed by the sub-committee. Copies of
telegrams were filed with the clerk. Mr. Good read telegram received from Mr.
John Skelton Williams, which was also filed with the clerk.
The Chairman read a further Order of Reference, as follows:—
Ordered—That the Report of Doctor Tory on Agricultural Credits, tabled on the 15th
April, be referred to the said Committee.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
?
Mr. Ladner suggested the calling of representatives of the Canadian Bankers
Association to give evidence as to bank inspection. Discussion followed and
Mr. Ladner’s suggestion was laid over for future consideration.
Committee decided to proceed with their investigation into “Bank Inspection
Systems”, “Safety of Deposits” and “Double Liability of Shareholders”; Dr.
Tory’s Report on “Agricultural Credits” to be investigated later.
exliv SELECT. STANDING COMMITTEE
14-15 GEORGE V, A. 192+
On motion of Mr. Stevens,
Ordered,—That this Committee request the Minister of Finance to nominate
an official of his Department to give evidence before the Committee as to the
operation and results of the last amendments to the Bank Act.
On motion of Mr. Vien, acting chairman of the sub-committee on witnesses,
Ordered,—That Sir William E. Stavert of Montreal be summoned to give
evidence before this Committee on Tuesday next; and that the official nominated
by the Minister of Finance be also requested to attend on that day to give
evidence.
On motion of Mr. Ladner,
Ordered —That the Minister of Finance be requested by this Committee
to obtain from the chartered banks of Canada pursuant to his powers under the
Bank Act the following information:—
1. The number of savings accounts in each of the chartered banks of Canada
having on deposit as at 30th April, 1924, the sum of $3,000 or less.
2. The total amount of money on said date in each of the said banks of
such savings accounts up to the sum of $3,000.
3. Similar information with respect to savings accounts between $3,000 and
$5,000.
4. Similar information with respect to savings accounts between $5,000 and
$10,000.
On motion of Mr. Shaw,
Resolved,—That this Committee is of opinion that the matter of guaranteeing
deposits is within the scope of the Reference, therefore,
Ordered,—That the sub-committee be empowered to consider the names of
witnesses familiar with the system or systems of guaranteeing deposits in vogue
and to report thereon to the Committee with a view of calling such witnesses.
Notices of Motion
No. 1.—By Mr. Shaw:—
That this Committee is of opinion that the purpose, organization aud
operation of some type of properly administered Central or Reserve Bank falls
within the scope of the Reference; and that the sub-committee is hereby
instructed to suggest to this Committee the names of competent witnesses to give
evidence on this subject.
No. 2.—By Mr. Ladner:—
That this Committee recommend to Parliament the elimination from the
Bank Act 1923, of all provisions relating to double liability of shareholders and
that accordingly section 125 of the said Act and other sections relating to question
of double liability be repealed.
The Committee adjourned at 12.50 o’clock a.m. to meet again at 11 o’clock
a.m. on Tuesday, May 13, 1924.
8. R. GORDON,
Clerk to Committee.
BANKING AND COMMERCE exlv
APPENDIX No. 1
Hovusr or CoMMoNs,
- Com™iITTEE Room 436,
Tuesday, May, 18, 1924.
The Committee met at 11 a.m.
In the absence of the Chairman Mr. Vien presided.
Present: Messieurs Baxter, Benoit, Bird, Black (Halifax), Black (Yukon),
Boivin, Cahill, Caldwell, Carmichael, Carruthers, Casgrain, Chaplin, Chevrier,
Clark, Clifford, Coote, d’Anjou, Desaulniers, Descoteaux, Drayton, Duncan,
Elliott (Waterloo), Fafard, Fortier, Garland (Bow River), Good, Grimmer,
Guthrie, Hanson, Harris, Hatfield, Healy, Hodgins, Hughes, Irvine, Jacobs,
Kellner, King (Huron), Ladner, Laflamme, McBride, Macdonald (Pictou),
Mackinnon, Maclean (York), McCrea, McKay, McMaster, McMurray, Mc-
Quarrie, McTaggart, Malcolm, Maybee, Millar, Morin, Papineau, Porter,
Rankin, Rhéaume, Robb, Robichaud, Robitaille, Ryckman, St. Pére, Sales,
Shaw, Sinclair (Oxford), Sinclair (Queens, P.E.I.), Speakman, Spencer, Steeds-
man, Stevens, Tobin, Vien, Woods and Woodsworth.—75.
The Clerk read telegrams received from Messers William P. Malburn,
Cleveland, Ohio and A. W. Mellon, Washington, D. C. (These appear in the
Minutes of Evidence of this date).
On motion of Mr. Shaw,
Ordered,—That the Clerk be instructed to secure a sufficient number of
copies of the “Bank Act” for the use of the members of the Committee.
On motion of Mr. Coote,
Ordered,—That a Report be presented to the House recommending that the
Committee be given leave to have their proceedings and such evidence as may
be given before them, printed from day to day for the use of the members of
the Committee and the House, and that Rule 74, relating thereto be suspended.
Presented to House, May 13, 1924. (See page 262, Votes and Proceed-
ings.) Concurrence moved, concurred in, May 13, 1924. (See page 264, Votes
and Proceedings.)
On motion of Mr. Mackinnon,
‘ Ordered,—That the following shall be the mode of procedure for this Com-
mittee :—
1. All motions and notices of motion must be in writing.
2. Amendments to the “Bank Act” introduced in Committee by Members
may be received as notices of motion to be discussed and not voted upon until
a subsequent meeting of the Committee. Members of the Committee shall be
furnished with copies of such amendments.
3. Non-contentions amendments to the “Bank Act” may be first disposed
of. Any amendment or clause to which there is objection stands on the request
of a Member for further consideration. Reconsideration shall be permissable on
notice of motion. ,
The Committee proceeded to consideration of the following Notice of Motion
standing in the name of Mr. Shaw:—
“That this Committee is of opinion that the purpose, organization and
operation of some type of properly administered Central or Reserve Bank falls
within the scope of the Reference, and that the sub-committee is hereby instructed
to suggest to this Committee the names of competent witnesses to give evidence
on this subject.”
1—10
/
exlvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Discussion followed.
The question having been raised as to whether or not the proposed motion
was within the scope of the Order of Reference, the acting Chairman reserved
his decision until a future meeting of the Committee.
On motion of Mr. Good,
Ordered,—That the sub-committee on witnesses be requested to recommend
from among those who are available, such witnesses as they think advisable and
to report at the next meeting of this Committee.
Mr. George Edwards, Chartered Accountant, Toronto, Ontario, who had
been nominated by the Department of Finance as a witness was called, gave
evidence and retired.
Committee adjourned at 1.05 o’clock p.m. to meet at 11 o’clock a.m. to-
morrow, Wednesday, May 14, 1924.
Ss. R. GORDON,
Clerk to Committee.
Hovusk or ComMons,
CommirTrEE Room 231,
Wednesday, May 14, 1924.
The Committee met at 11 o’clock A.M.
In the absence of the Chairman, Mr. Vien presided.
Present: Messieurs Cahill, Carmichael, Carruthers, Casgrain, Chaplin,
Clark, Clifford, Coote, Descoteaux, Elliott (Dundas), Elliott (Waterloo), Gar-
Jand (Bow River), Good, Grimmer, Hanson, Harris, Hatfield, Healy, Hodgins,
Hudson, Hughes, Irvine, Jacobs, Kellner, King (Huron), Ladner, Laflamme,
McBride, Macdonald (Pictou), Maclean (York), Macphail, McKay, McMaster,
McQuarrie, McTaggart, Marler, Maybee, Miller, Morin, Papineau, Robb, Ryck-
man, Sales, Senn, Shaw, Sinclair (Oxford), Sinclair (Queens), Spencer, Steeds-
man, Stevens, Tobin, Vien, Woods and Woodsworth.—54.
The acting Chairman, read a further Order of Reference as follows:—
Ordered,—That the said Committee be authorized to have their proceedings and such
evidence as may be taken, printed from day to day for the use of the members of the
Committee and of the House.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
The Acting Chairman, for Mr. Cahill, read the third Report of the sub-
mittee as follows:—
3rd REPORT OF BANKING AND COMMERCE SUB-COMMITTEE
_ Your sub-committee recommend that the following witnesses be called,
viz:—
Mr. John Skelton Williams, Richmond, Virginia, former Comptroller of the
Currency at Washington, to be requested to give evidence on Tuesday, May 20th.
Mr. J. W. Pole, Washington, D.C., Chief National Bank Examiner, to be
requested to give evidence on Thursday, May 22nd.
BANKING AND COMMERCE exlvii
APPENDIX No. 1
Messrs, E. W. Stearns, of the Comptroller’s office Washington, D.C., and
Sherill Smith, Vice-President, Chase National Bank, New York, to be requested
to give evidence on a later date to be decided upon.
Your sub-committee have instructed the Clerk of the Committee to
telegraph Messrs Williams and Pole with the view of ascertaining whether or
not the dates recommended will suit their convenience.
Frank S. Canin,
Chairman of the sub-committee.
On motion of Mr. Tobin the Report of the sub-committee was adopted as
read.
On motion of Mr. Good,
Ordered,—That Mr. John Skelton Williams, Richmond Virginia, former
Comptroller of the Currency be requested to give evidence before this Com-
mittee on Tuesday, May 20th and that Mr. Williams be tendered the usual
travelling and living expenses of a witness before parliamentary committees.
On motion of Mr. Irvine,
Ordered,—That Mr. J. W. Pole, Washington, D.C., Chief National Bank
examiner, be requested to give evidence before this Committee on Thursday,
May 22nd, and that Mr. Pole be tendered the usual travelling and living ex-
penses of a witness before parliamentary committees.
On motion of Mr. Irvine,
Ordered,—That a Report be presented to the House asking that the Com-
mittee be granted leave to sit while the House is in session. Presented to House,
May 14, 1924. Concurrence moved, concurred in, May 14, 1924. (See page
267, Votes and Proceedings.)
Mr. George Edwards, Chartered Accountant, Toronto, who was in attend-
ance, continued his evidence and retired.
Notice of Motion
Mr. Ladner gave notice of the following Motion:—
SAVINGS DEPOSITS AND THEIR PROTECTION.
“That in the opinion of this Committee the Bank Act should be amended
in order to provide for the establishment in the chartered banks of Canada of a
special savings account or other class of accounts for savings deposits in addition
to those now existing, whereby all holders of deposits in such special savings
account in any one bank, or branch thereof, shall be protected or guaranteed
against loss up to the sum of $3,000 according to a similar principle as that now
provided for in sections 62 to 69 inclusive of the Bank Act relating to the pro-
tection of bank notes by the establishment of a fund known as the Bank Circu-
lation Redemption Fund, or that such special savings account be established in
accordance with some other principle of imsurance “the premium of which will
be paid by the depositors or the chartered banks of Canada, or both, or in such
other manner as the committee may consider capable of giving reasonable pro-
tection to depositors of money in savings accounts in such sums as the com-
mittee may determine.”
The Committee adjourned at 1.15 o'clock ae to meet at 11 o’clock to-
morrow, Thursday, May 15, 1924.
S. R. Gorpon,
Clerk to Committee.
1 Wi
exlviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Hovusr or ComMMons,
CoMMITTEE Room 231,
Tuurspay, May 15, 1924.
The Committee met at 11 o’clock a.m.
In the absence of the Chairman Mr. Vien presided.
Present: Messieurs Baxter, Benoit, Bird, Black (Halifax), Bristol, Cahill,
Caldwell, Carmichael, Carruthers, Chaplin, Chevrier, Clark, Clifford, Coote,
Desaulniers, Descoteaux, Drayton, Duncan, Elliott (Dundas), Elliott (Water-
loo), Garland (Bow River), Good, Grimmer, Hanson, Harris, Hatfield, Healy,
Hodgins, Hughes, Irvine, Jacobs, Kellner, King (Huron), Ladner, McBride,
Macdonald (Pictou), Mackinnon, Maclean (York), Macphail, McCrea, McKay,
McMaster, McQuarrie, McTaggart, Malcolm, Marler, Maybee, Morin, Papineau,
Rankin, Robb, Bobitaille, Ryckman, Sales, Senn, Shaw, Sinclair (Oxford),
Sinclair (Queens, P.H.I.), Speakman, Spencer, Steedsman, Stevens, Vien, Ward
and Woods—65.
The acting Chairman read telegraphic correspondence between Mr. J.
Skelton Williams and the Chairman and Clerk, in which the date for Mr. Wil-
liams appearance before the Committee was set for Thursday, May 22nd, and
between Mr. J. W. Pole and the Clerk in which the date for Mr. Pole’s appear-
ance was set for Tuesday, May 20th.
Mr. George Edwards, Chartered Accountant, Toronto, who was in attend-
ance, continued his evidence and retired.
The Committee adjourned at 1.05 o’clock p.m. to meet again at 2 o’clock
p.m.
The Committee reassembled at 2 o’clock p.m., the Acting Chairman, Mr.
Vien, presiding.
_ Sir William E. Stavert, Financier, Montreal, who was in attendance in
obedience to summons, was called, sworn, gave evidence and was discharged
from further attendance.
The Committee adjourned at 3.10 o’clock p.m. to meet again at 11 o’clock
a.m. on Tuesday, May 20, 1924.
S. R. GORDON,
Clerk to Committee.
BANKING AND COMMERCE cexlix
APPENDIX No. 1
Housr or Commons,
Commirrer Room 429,
Turspay, May 20, 1924.
The Committee met at 11 o’clock a.m.
Present: Messieurs Benoit, Black (Yukon), Cahill, Caldwell, Carmichael,
Carruthers, Clifford, Coote, Crerar, d’Anjou, Descoteaux, Duncan, Elliott
(Dundas), Elliott (Waterloo), Fafard, Fortier, Garland (Bow River), Grimmer,
Hanson, Hatfield, Healy, Hodgins, Hudson, Hughes, Kellner, Ladner, Macdonald
(Pictou), Mackinnon, Maclean (York), Miss Macphail, Messieurs McCrea,
McKay, McMaster, McQuarrie, McTaggart, Malcolm, Marler, Maybee, Miller,
Morin, Papineau, Rankin, Rhéaume, Robb, St. Pére, Sales, Senn, Shaw, Sinclair
(Oxford), Sinclair (Queens, P.E.I.), Speakman, Spencer, Steedsman, Stevens,
Stork, Tobin, Vien, Ward, Woods, Woodsworth,—60.
Owing to the resignation of the Hon. Walter G. Mitchell, the Chairman of
this Committee, as a Member of the House, it was necessary to select another
Chairman, and on motion of Mr. Hughes, seconded by Mr. Spencer, Mr. Vien
was unanimously selected, took the Chair and presided.
A copy of a letter from His Honour the Speaker addressed to Mr. A. C.
Campbell, Editor of Debates and Chief of Reporting Branch, with reference to
the reporting of evidence taken before the Committees, was ordered to be printed
in the proceedings of to-day. (Letter follows.)
House or ComMMons,
CANADA
The Speaker
March 27, 1924.
Dear Mr. Camppeti,—As you have asked for instructions with regard
to your duties at this time, this letter is to confirm my verbal statements.
As Chief of the Reporting Branch you are aware that great extra
expense has been involved in the reporting of Committees of the House,
and it is my desire to limit such expense as closely as possible. The
salaries of our Committee Reporting Staff and their assistants, together
with fees paid to extra reporters, make a total for this service which is
altogether too great. This is not to suggest any lack of attention to
economy on your part except that, possibly, in the zeal of yourself and
your staff to meet the wishes of the Chairman and members of every
Committee, you may have given too wide an interpretation to instructions
given to your predecessors years ago.
Your present Committee Reporting Staff consists of a chief and two
reporters, but the establishment fixed by the House allows for the employ-
ment of another reporter. I understand that the vacant position has
been advertised by the Civil Service Commission, and that the necessary
examination is now in progress. It is my desire that the work of report-
ing should be done by this staff as far as possible, and that only in case
of urgent need should any extra assistance be engaged. Last session, as
you will remember, one of your temporary reporters put in a bill for hotel
expenses. This being new, I at first disallowed it, but afterwards con-
sented to the payment in view of the smallness of the sum involved, and
the special stress of work which seemed to compel the employment of the
one concerned. But, as you will remember, I distinctly stated at the time
that this instance was not to be drawn into a precedent. You will be
guided accordingly in the engagement of extra reporters this session.
el SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
My investigation of the matter leads me to believe that the reports
made by your assistants are unduly extended. You are aware that the
work of the Committee staff is confined to the reporting of evidence taken
before Committees and that the reporting of discussions is not permitted.
This is made very clear in the instructions given by the late Dr. Thomas
B. Flint, then in charge of these matters as Clerk of the House; on 15th
November, 1910, he wrote as follows:—
The members of the Staff of Official Stenographers to Commit-
tees of the House are hereby instructed that their duties are limited
to the reporting of evidence given before such committees. Beyond the
mere noting of objections raised and the Chairman’s ruling thereon,
which is necessary to render the record intelligible, discussions in
committee are not to be taken down in shorthand and transcribed.
These instructions seem to me to apply at this time as well as when
they were given. They are therefore renewed to-day. You will carry
them out strictly.
Yours faithfully,
(Sgd.) RODOLPHE LEMIEUX,
Speaker.
A. C. CAMPBELL, Esq.,
Editor of Debates and
Chief of Reporting Branch,
House of Commons.
Orrawa, 15 November, 1910.
Sir,—Clerks of Committees and Stenographers are requested to note
the following regulation :—
“The members of the Staff of Official Stenographers to Com-
mittees of the House are hereby instructed that their duties are limited
to the reporting of evidence given before such committees. Beyond
the mere noting of objections raised and the Chairman’s ruling there-
on, which is necessary to render the record intelligible, discussions
in committee are not to be taken down in shorthand and transcribed.”
I am,
Yours truly,
THOMAS B. FLINT,
Clerk of the House of Commons.
Notice of Motion
Mr. Spencer gave notice that on a subsequent date he would move the follow-
ing resolution :—
“That the Bank Act be amended to provide that the moneys in the
Circulation Fund shall first be applied to the payment of the notes of a
bank which has suspended payment and that the other assets of the bank
be not applied to the payment of such notes until the moneys in the said
fund are first exhausted ”.
Mr. John W. Pole, Chief National Bank Examiner, Washington, D.C., who
was in attendance in obedience to summons, was called, sworn, gave evidence
and retired.
Committee adjourned at 1.15 o’clock p.m. to meet at 4 o’clock p.m. this day.
Committee reassembled at 4 o’clock p.m.
Mr. John W. Pole, continued his evidence and retired.
Committee adjourned at 5.40 o’clock p.m. to meet at 11 o’clock a.m. to-
morrow, Wednesday, May 21, 1924.
5: Ry GORDON,
Clerk to Committee.
BANKING AND COMMERCE eli
APPENDIX No. 1
Hovusr ofr ComMMOoNs,
CommiTTEE Room No. 429,
Wenpnespay, May 21, 1924.
The Committee met at 11 o’clock A.M.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Cahill, ‘Carmichael, ‘Carruthers, Casgrain,
Chevrier, Clifford, Coote, Crerar, Desaulniers, Descouteaux, Duncan, Elliott
(Dundas), Euler, Fafard, Garland (Bow River), Good, Hanson, Hatfield,
Hodgins, Hughes, Kellner, Ladner, Macdonald (Pictou), Maclean (York),
Miss Macphail, Messieurs McKay, McMaster, McTaggart, Malcolm, Marler,
Millar, Papineau, Sales, Shaw, Sinclair (Queens P.E.I.), Spencer, Steedsman,
Stevens, Vien, Ward and Woodsworth.—42.
Notice of Motion
Mr. Garland gave notice that on a subsequent date he would move the
following Resolution:—
“That Schedule ‘G’ of the Bank Act under the caption ‘Assets’
be amended by adding thereto the following items:—‘Appropriation
Account,’ ‘Contingent Reserve,’ ‘Undistributed Profits’.”
The question having arisen as to the number of copies of the Reports
being printed, the Chairman took the question under consideration, to report
at a future meeting of the Committee.
On motion of Mr. Coote, seconded by Mr. Shaw,
Ordered,—That Dr. Tory be requested to appear before the Committee
on Wednesday, May 28th, 1924.
Mr. John W. Pole, Chief National Bank Examiner, Washington, D.C., who
was again in attendance gave further evidence.
A point of order having been raised as to the admissibility of evidence
touching upon the Federal Reserve Banking system and upon a proposed
Resolution moved by Mr. Shaw, of which notice had been given, the Chairman
ruled as follows:—
1. The Order of Reference from the House to this Committee reads as
follows:
“The Select Standing Committee on Banking and Commerce should be
instructed to consider the provisions of the Bank Act with a view to recom-
mending such amendments to the Act as will better protect the interests of
depositors generally and will prevent similar occurrences in the future.”
2. Mr. Shaw moves the following:
“That this Committee is of the opinion that the purpose, organization and
operation of some type of properly administered Central or Reserve Bank falls
within the scope of the Reference, and that the subcommittee be hereby
instructed to suggest to this Committee the names of competent witnesses to
give evidence on this subject.”
3. The creation of a Central or Reserve Bank, however, would be a radical
departure from our present system of banking.
4. Did the House intend to empower this Committee to recommend amend-
ments which would fundamentally change the Act?
clii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
5. The Act is revised every ten years, and it would be detrimental to the
stability of our financial institutions if a thorough revision were to take place
every year.
6. The Order of Reference limits us to recommending such amendments
as would better protect the interests of the depositors.
7. The purpose of the Central or Reserve Bank is not directly better to
protect the depositors, but to afford greater rediscounting facilities.
8. The difficulties which confront the depositors of the Home Bank appear
to be due, not to the lack of discounting facilities, but on the contrary, to the
great facility with which the Bank made advances on doubtful or valueless
securities.
9. A Central or Reserve Bank could not have rediscounted these doubtful
securities, and therefore would not have offered a greater elasticity, and the
depositors would have received no additional security for their deposits.
10. It has not been established to the satisfaction of the Chair that the
organization and operation of some type of Central Bank would better protect
the interests of depositors generally, and would prevent similar occurrences
in the future.
11. The matter of the establishment of a Central or Reserve Bank was
fully investigated last year, and a considerable time was spent in collecting
valuable information which has been printed and which is now available to
Honourable Members.
12. It is possible that any change in the Bank Act more or less remotely
affects the interests of the depositors.
13. But should we not endeavour to suggest amendments most likely to
receive the approval of Parliament, and primarily some method which would
have a more certain, direct and decisive effect to increase the safety of the
depositors.
14, In my opinion, such were the instructions of the House.
15. To. do otherwise would turn this limited Reference into an unlimited
one, involving possibly the revision of the whole Act.
16. In my humble judgment, I am obliged sc to decide, and therefore to
find that the subject-matter covered by Mr. Shaw’s motion, namely the pur-
pose, organization and operation of a Central or Reserve Bank, does not fall
within the scope of the Order of Reference.
Mr. Shaw moved, seconded by Mr. Spencer:
“That the ruling of the Chair be not sustained.”
The question being put on Mr. Shaw’s motion it was negatived on
division; Yeas 12; Nays 14. The names being called for, were taken down
as follows:—
Yeas:—Messieurs Benoit, Coote, Elliott, Garland, Good, Hodgins, Maclean
(York), Macphail (Miss), McMaster, Shaw, Spencer, Ward.—12.
Nays:—Messieurs Carmichael, Carruthers, Clifford, Duncan, Grimmer,
Hanson, Hatfield, Hudson, Hughes, Kellner, McTaggart, Marler, Ryckman,
Stevens.—14.
Mr. Ladner moved, seconded by Mr. Good:
“That a Report of this Committee be presented to the House
requesting that the Order of Reference be enlarged so as to embrace
the study and consideration of the purpose, organization of some type
of properly administered Central or Reserve Bank.”
BANKING AND COMMERCE cliii
APPENDIX No. 1
The question being put, it was passed in the Affirmative, on division. The
Names, being called for, were taken down as follows:—
Yeas:—Messieurs Benoit, Carruthers, Clifford, Coote, Clifford, Elliot
(Dundas), Euler, Garland, Hodgins, Hudson, Hughes, Kellner, Ladner,
Maclean, McKay, McMaster, McTaggart, Sales, Shaw, Spencer, Ward, Woods-
worth.—22.
Nays.—Messieurs Carmichael, Grimmer, Hanson, Hatfield, Marler,
Ryckman, Stevens.—7.
Presented to House, May 21, 1924. (See page 295, Votes and Proceedings.)
Concurrence moved, concurrence lost on division, July 2, 1924. (See page 471,
Votes and Proceedings.)
Mr. Pole continued his evidence and retired.
The Committee adjourned at 1.15 o’clock p.m. to meet again at 11 o’clock
a.m. to-morrow, Thursday, May 22, 1924.
8S. R. GORDON,
Clerk of Committee.
Hovusr or ComMMons,
CoMMITTEE Room 429,
TuHourspay, May 22, 1924.
The Committee met at 11 o’clock A.M.
The Chairman, Mr. Vien, presided.
PresENT: Messieurs Baxter, Benoit, Bird, Bristol, Cahill, Carmichael,
Carruthers, Chevrier, Clifford, Coote, Descoteaux, Duncan, Elliott (Dundas),
Kuler, Garland (Bow River), German, Good, Grimmer, Hanson, Hatfield, Healy,
Hodgins, Hudson, Hughes, Kellner, Ladner, McBride, Macdonald (Pictou),
Maclean (York), Miss Macphail, Messieurs McKay, McMaster, McQuarrie,
McTaggart, Marler, Maybee, Millar, Papineau, Power, Rankin, Ryckman,
St. Pere, Sales, Shaw, Sinclair (Oxford), Sinclair (Queens, P.E.I.), Spencer,
Steedsman, Stevens, Tobin, Vien, Ward, Woods and Woodsworth—54.
Notice of Motion
Mr. Hughes gave notice that on a subsequent date he would move the
following resolution: —
“That the Bank Act be amended by adding thereto as subsection
three of section 125, the following:—
“ (3) Transfer or sale of shares of the bank by directors or other
executive officers of the Bank, made within a period of one year prior to
any suspension by the bank of payment of any of its liabilities as they
accrue in specie or Dominion notes, shall be null and void at the option
of the transferee who may elect to return such shares or any of them to
the transferor and be and be thereupon entitled to recover the amount
of the purchase price thereof, and, in the event of such option being
exercised the transferor shall be and become liable as a shareholder under
subsection one of this section and the transferee be not liable in any
respect whatsoever as to the said shares under the said subsection one
thereof.”
eliv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
On motion of Mr. McKay, seconded by Mr. McBride
Ordered,—That the number of copies of the Reports of of this Committee
to be sent to Members of the Committee be limited to a maximum of ten each.”
Mr. John W. Pole, Chief Examiner of National Banks, Washington, D.C.,
who was again in attendance, concluded his evidence and was discharged from
further attendance, after the Chairman had expressed the pleasure of the Com-
mittee in Mr. Pole appearing before them, to which Mr. Pole made suitable
reply.
The Committee adjourned at 12.50 o’clock P.M. to meet again at 2 o’clock
P.M. this day.
The Committee reassembled at 2 o’clock P.M., the Chairman, Mr. Vien,
presiding.
Mr. J. Skelton Williams, Financier, Richmond, U.S.A., who was in attend-
ance in obedience to summons, was called, sworn, gave evidence and was dis-
charged from further attendance after the Chairman had expressed the thanks
of the Committee to Mr. Williams, and Mr. Williams’ reply.
The Committee adjourned at 5.10 o’clock P.M. to meet again at 11 o’clock
A.M. on Tuesday, May 27, 1924.
Ss. R. GORDON,
Clerk to Committee.
Housr or CoMMons,
CommiIrTEe Room 429,
Turspay, May 27, 1924.
The Committee met at 11 o’clock, a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Carmichael, Carruthers, Coote, d‘Anjou, Descoteaux,
Elliott (Dundas)), Euler, Good, Grimmer, Harris, Healy, Hodgins, Hughes,
Irvine, Maclean (York), McKay, McMaster, McQuarrie, McTaggart, Marler,
Maybee, Morin, Papineau, Rankin, Robb, Ryckman, St. Pére, Shaw, Sinclair
(Queens, P.E.I.), Speakman, Spencer, Stevens, Vien and Ward.—35.
The Chairman read communications received from Mr. Robert Forke, M_P.,
enclosing letter from Messrs Campbell and Duke re the exchange charged on
cheques, which letter was read into the minutes of evidence of to-day; from
Mr. C. M. Gripton re Home Bank shareholders; from Mr. David Mills re
bank inspection; from Mr. G. G. Henderson, Mayor of Fernie, B.C.; Association
de Secours pour les Deposants de la “Home Bank” and Organization des
Deposants de la Province de Quebec re Home Bank depositors; from Mr.
W. O. Sealey re post office savings banks and government inspection of banks.
The Chairman reported that the sub-committee had not met for some
time but that it had been arranged to have Dr. H. M. Tory appear before the
Committee, to-morrow, Wednesday; that the Bankers’ Association had requested
that Mr. Charles E. Neill, acting President of the Association be heard.
Committee decided to hear Mr. Neill on Friday next.
BANKING AND COMMERCE elv
APPENDIX No. 14
Hon. Mr. Robb, acting Minister of Finance, stated to the Committee what
the Government proposed re bank inspection legislation.
Notice of Motion
Mr. Maclean gave notice that on a subsequent date he would move the
following: —
“That in the opinion of this Committee the post office savings banks
system be extended by marking cheques against accounts in same
at the office of deposit.”
By unanimous consent, on motion of Mr. McMaster, seconded by Mr.
McKay :—
Ordered,—“ That a report be presented to the House recommending that
the Minutes of Proceedings and Evidence taken before the Select
Special Committee on Agricultural Conditions of last session be
referred to this Committee.” (Presented to House, concurrence
moved, concurred in, May 27, 1924. See pages 326 and 327, Votes
and Proceedings. )
Mr. George D. Finlayson, Superintendent of Insurance, Department of
Finance, Ottawa, who was in attendance at the request of the Committee, was
called, gave evidence and retired.
The Committee adjourned at 1.05 o’clock, p.m., to meet at 11 o’clock, a.m.,
to-morrow, Wednesday, May 28th, 1924.
o BR. GORDON,
Clerk to Committee.
Hovse or CoMMoNs,
CoMMITTEE Room 429,
Wepnespay, May, 28, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Carmichael, Carruthers, Clifford, Coote,
d’Anjou, Duncan, Elliott (Waterloo), Euler, Garland (Bow River), Good,
Grimmer, Harris, Hodgins, Hughes, Irvine, Kellner, Maclean, (York), McKay,
McMaster, McQuarrie, Maybee, Millar, Papineau, Ryckman, St. Pére, Sales,
Senn, Shaw, Sinclair (Queens, P.E.L.), Speakman, Spencer, Steedsman, Stevens,
Vien and Ward—36.
The Chairman read a further Order of Reference as follows:
“That the Minutes of Proceedings and Evidence taken before the Select Special Com-
mittee on Agricultural Conditions last session be referred to this Committee.”
Notices of Motion
Mr. Hodgins gave notice that on a subsequent date he would move the
following:
“Resolved that Section 131 of the Bank Act be amended so that
government deposits will not have precedence over private deposits.”
elvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Coote gave notice that on a subsequent date he would move the
following:
“That in the opinion of this Committee legislation should be
brought down this session to provide for the establishment of long
term credits.”
Dr. H. M. Tory, President of the University of Alberta and Administra-
tive Chairman of the Industrial Research Council, who was in attendance in
obedience to summons, was called, sworn, gave evidence and retired.
The Committee adjourned at 1 o’clock p.m. to meet again at 8.30 o’clock
p.m. this day.
The Committee reassembled at 8.30 o’clock p.m., the Chairman, Mr.
Vien, presiding.
Dr. H. M. Tory, who was again in attendance, continued his evidence
and retired.
The Committee adjourned at 10.55 o’clock p.m. to meet again at 10
o’clock a.m. on Friday, May 30, 1924.
8. R. GORDON,
Clerk of Committee.
House or CoMMONS
ComMMITTEE Room 429,
Fray, May 30, 1924.
The Committee met at 10 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Black (Halifax), Cahill, Caldwell, Carruthers,
Clark, Clifford, Coote, Euler, Garland (Bow River), German, Good, Grimmer,
Hanson, Hatfield, Healy, Hodgins, Hughes, Irvine, Kellner, Ladner, McBride,
Mackinnon, Maclean (York), McKay, McQuarrie, Maybee, Miller, Rankin,
Ryckman, St. Pére, Sales, Sinclair (Queens, P.E.I.), Steedsman, Stevens, Tobin,
Vien, Ward, Woods, Woodsworth.—40.
After Consideration of Private Bills,—
The Chairman read the following letter from Mr. A. W. Mellon:—
The Secretary of the Treasury
(Seal) WasHineTon, May 26, 1924.
Dear Sir,—I have your letter of May 23, and if there is any further assist-
ance which the Treasury may be to your committee in its investigation, please
advise me.
Very truly yours,
(Sgd.) A. W. MELLON,
Secretary of the Treasury.
Tuomas Vien, Esq,,
Chairman, Banking and Commerce Committee,
Chambre des Communes,
Ottawa, Canada.
BANKING AND COMMERCE elvii
APPENDIX No. 1
Notices of Motion
Mr. McQuarrie gave notice that on a subsequent date he would move the
following:—
“That the Deputy Minister of Finance or some other official of the
Department of Finance to be delegated by him, be requested to appear
before this Committee and five evidence as to the present system of
rediscounting and generally as to the regulations of dealings between the
Department of Finance and the banks and the operation of the Bank
Act.”
Mr. Coote gave notice that on a subsequent date he would move the fol-
lowing :—
“That this Committee recommend an amendment to the Bank Act
which should provide that in each office of a chartered bank in Canada,
notice should be displayed in large type in a prominent position, stating
that the Government of Canada assumes no responsibility in regard to
any monies deposited in the said bank.”
Mr. Coote gave notice that on a subsequent date he would move the fol-
lowing :—
“That the Bank Act be amended by adding thereto as Section 113-A
the following:
‘There shall be posted up within 15 days from the end of each
calendar month in every branch of the Bank in a conspicuous place on
the premises thereof, accessible to the public, a statement signed by the
Manager or Acting Manager of such branch, showing the total monies on
deposit in said branch and total loans outstanding on the last day of the
preceding month.’ ”
By unanimous consent, on motion of Mr. Shaw, seconded by Mr. Good,
Ordered: That a Sub-committee of 7 members of this Committee be
appointed by the Chairman to study and consider appropriate emergency legis-
lation by the Federal Government during the present session, for the purpose of
temporarily granting Long Term Rural Credits;
And further, that the said Sub-Committee consider the existing Bankruptcy
Law- with a view to such amendments thereto as will make such law more
applicable to the needs and situation of the farming community;
And further, that said Sub-committee make its recommendation on the
above matters to this committee at as early a date as possible.
Mr. C. E. Neill, Acting President of the Canadian Bankers’ Association,
Montreal, who was in attendance, was called, sworn, gave evidence and retired.
The Committee adjourned at 1.35 o’clock p.m. to meet again at 4 o’clock
p.m. this day.
The Committee reassembled at 4 o’clock p.m., the Chairman, Mr. Vien,
presiding.
Dr. H. M. Tory, who was again in attendance continued his evidence and
retired.
The Committee adjourned at 6.05 o’clock p.m. to meet at 11 o’clock a.m.
on Thursday, June 5, 1924.
S. R. GORDON,
Clerk of Committee.
elviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Hovse oF CoMMONS,
CoMMITTEE Room 429,
Thursday, June 5, 1924.
The Committee met at 11 o’clock A.M.
The Chairman, Mr. Vien, presided.
Present:—Messieurs Benoit, Black (Halifax), Carmichael, Carruthers,
Clifford, Coote, Descoteaux, Duncan, Elliott (Dundas), Euler, Garland (Bow
River), "German, Good, Harris, Hatfield, Healy, Irvine, Kellner, Ladner, Mac-
lean (York), Macphail (Miss), McCrea, McKay, McQuarrie, McTaggart, Mal-
colm, Marler, Maybee, Miller, Morin, Robb, St. Pére, Sales, Shaw, Sinclair
(Oxford), Spencer, Steedsman, Stevens, Vien and Ward—40.
The Chairman read a letter he had received from Mr. J. W. Pole, Chief
National Bank Examiner, Washington, D.C,
The Chairman reported that, as instructed by the Committee, he had
appointed a sub-committee of seven Members, Viz: Messieurs Coote, Euler,
McKay, McMaster, Shaw, Stevens and Vien, to study with Dr. H. M. Tory
the matter of emergency Rural Credit legislation and to report their finding
to the Committee.
Mr. McKay, for the sub-committee on Rural Credits, reported progress.
Notices of Motion
Mr. Coote raised the question of the completeness of the printed Reports
of the Committee and gave notice that on a subsequent date he would move the
following: —
“That this Committee request the permission of the House of Com-
mons to print such of its discussions as it may deem expedient.”
Mr. Coote also gave notice that on a subsequent date he would move the
following:
“That in the opinion of this Committee, the Banking Act should
be amended by adding a section which should provide for limitation of
the amount of a loan which could be made by any Bank to any person,
firm or corporation to an amount not exceeding 10 per cent of the paid
up capital and reserve funds of said Bank.”
Mr. Robb, Acting Minister of Finance, gave notice that on a subse-
quent date he would move the following:—
Bill Entitled “An Act to Amend The Bank Act”
Section 564A of The Bank Act is repealed, and the following is
substituted therefor:
Inspection
56A. The Minister shall appoint a person who has had training and
experience in the business of banking who shall be charged with the per-
formance of the duties hereinafter mentioned. Such person shall be
designated “Inspector-General of Banks” and is hereinafter called the
Inspector. :
BANKING AND COMMERCE clix
APPENDIX No. 1
2. The Inspector shall hold office during good behaviour, but may
be removed from office by the Governor-in-Council for misbehaviour or
for incapacity, inability, or failure to perform his duties properly.
3. If the Inspector is removed from office for any of such reasons,
the Order-in-Council providing for such removal and all documents
relating thereto shall be laid before Parliament within the first fifteen
days of the next ensuing session.
4. The Inspector while holding office shall not perform any service
for compensation other than the service rendered by him under the pro-
visions of this section.
5. The Minister may appoint or employ, on the recommendation of
the Deputy Minister of Finance and the Inspector, such persons with
training and experience in the business of banking or auditing, and such
clerical assistance, as may be deemed necessary to carry out and give
effect to the provisions of this section. Persons so appointed or employed
shall receive such salary or remuneration as may be fixed by the Minister.
6. The Inspector, or other person appointed or employed under this
section acting under his direction, shall at least once in each calendar
year, and oftener if considered necessary by the Inspector or the Min-
ister, examine and inquire into the affairs and business of each bank, and
at the conclusion of the examination and enquiry a report thereon shall
be made to the Minister. Such examination and enquiry shall be con-
ducted at the chief office of the bank, or office. of the General Manager
if the office of the General Manager is at a place other than the Chief
Office of the Bank, and it shall not be necessary for the Inspector or
such other person to conduct any part of such examination at the
Branches of the Bank unless in his judgment reports from the Branches
or other evidence, or lack of reports or evidence, render an examination
necessary at particular branches.
7. A copy of all reports made by the auditors of a Bank to the
General Manager and to the Directors under the next preceding section
shall be transmitted or delivered to the Minister by the auditors at the
same time as such reports are transmitted or delivered to the General
Manager and Directors.
8. The Inspector, or person acting under his direction, shall have a
right of access to the books and accounts, documents, vouchers and
securities of the bank, and shall be entitled to require and receive from
the directors, officers and auditors of the bank such information and
explanation as may be necessary for the performance of his duties.
9. The Inspector, or person acting under his direction, shall have
power to examine under oath the general manager and any of the other
officers of the bank, and a general manager or other officer who refuses
to submit to such examination commits an offence against this Act and
is liable as provided in Section 157 of this Act.
10. Whenever the Inspector is satisfied that a bank is insolvent he
shall report fully on the bank’s condition to the Minister and the Min-
ister may, without waiting for the bank to suspend payment in specie
or Dominion notes of any of its liabilities as they accrue, request the
Association or the President of the Association to appoint a curator to
supervise the affairs of such bank, and such request shall have the same
effect as if the bank had suspended payment in specie or Dominion notes
of any of its liabilities as they accrued, and a curator shall forthwith
be appointed as provided in section 117 of this Act.
11. The Inspector shall be paid a salary fixed by the Minister at
a sum not exceeding Twenty-five thousand dollars per annum.
elx
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
12. All salaries, remuneration and other expenses incidental to giving
effect to this section shall be paid out of the Consolidated Revenue
Fund, and the Consolidated Revenue Fund shall be recouped after the
end of each calendar year for such outlay by an assessment upon the
banks based upon the average total assets of the banks respectively
during the year, as shown by the monthly returns made by the banks
to the Minister under section 112, and such assessment shall be paid by
the banks.
13. All persons appointed under this section shall be officers of the
Department of Finance, but the provisions of the Civil Service Act, 1918,
shall not apply to such persons.
14. Any director, president, general manager or other officer of the
bank who directly or indirectly makes a loan or grant or give any
gratuity to the Inspector or any other person appointed or employed
under this section, and the Inspector or any such person who accepts
or receives, directly or indirectly, any such loan, grant or gratuity,
commits an offence against this Act, and is liable as provided in section
157 of this Act, in addition to any punishment otherwise provided.
15. The Inspector and any person appointed or employed under this
section who disclose to any other person, except the Minister and the
Deputy Minister of Finance, any information regarding a bank, its
ap ot ate eee Se eee ae ae business or affairs commits an offence
against this Act and is liable as provided in section 157 of the Act.
16. Provided however that the Government shall not incur any
liability whatever to any depositor, creditor or shareholder of any bank,
or to any other person, for any damages, payment, compensation or
indemnity which he may suffer or claim by reason of this section or
anything therein contained, or by reason of anything done or omitted
to be done under the requirements thereof, or by reason of anything
omitted to be done which is thereby required to be done, or by reason
of any order or direction of the Governor in Council or of the Minister
in the execution or administration of the powers or any of them by this
section conferred, or by reason of any failure or omission on the part of
Governor in Council or of the Minister or of the Inspector, or of any
officer or employee of the Government to execute or discharge any power,
authority or duty thereunder, or otherwise by reason of any default,
negligence, mistake, error or omission in the administration or discharge
of the powers or duties which in any circumstances are by this section
intended or authorized to be executed or performed and no such pay-
ment, damages, compensation or indemnity, nor any claim therefor,
shall in any case be authorized, paid or entertained by the Government.
17. This section shall come into force on the first day of October,
nineteen hundred and twenty-four, but it shall not be incumbent upon
the Inspector to examine all of the banks under the section during the
calendar year one thousand nine hundred and twenty-four.
Discussion followed.
Mr. George Edwards, who was again in attendance, was called, gave
evidence and retired.
The Committee adjourned at 1.15 o’clock p.m. to meet at 11 o’clock a.m.
on Tuesday, June 10, 1924.
Ss. R. GORDON,
Clerk of Committee.
BANKING AND COMMERCE elxi
APPENDIX No. 1
House or ComMMoNs,
CoMMITTEE Room 429,
Wepnespay, June 11, 1924.
The Committee met at 11 o’clock A.M.
Present:—Messieurs Benoit, Black (Halifax), Carmichael, Carruthers, Cas-
grain, Clifford, Coote, Descoteaux, Elliott (Dundas), Euler, Fafard, Garland
(Bow River), Good, Grimmer, Hanson, Healy, Hodgins, Hughes, Irvine, Kellner,
Maclean (York), Macphail (Miss), McKay, McMaster, McQuarrie, Marler,
Maybee, St. Pére, Sales, Shaw, Sinclair (Oxford), Spencer, Ward and Woods
—34.,
The Clerk informed the Committee of the unavoidable absence of the
Chairman.
On motion of Mr. McKay, seconded by Mr. Irvine, Mr. McMaster was
selected as acting Chairman.
The Acting Chairman read communications received from the Home Bank
Depositors’ Relief Committee, Toronto and the Clerk’s replies thereto.
Mr. McKay, for the sub-committee on Rural Credits, reported progress.
Notices of Motion
Mr. Coote, for Mr. Ladner, gave notice that on a subsequent date he
would move the following:
“Resolved,_That this Committee recommend to Parliament the
establishment, in the chartered banks of Canada, of an additional class
of savings accounts whereby all holders of deposits, who may place their
money in such class of accounts, in any one bank or branch thereof, shall
be protected against loss up to the sum of $3,000 by the establishment
of a fund on an insurance basis, the premiums of which will be contributed
by the depositor and the bank in such proportion as may be determined
and that the Government work out the details and actuarial data neces-
sary for the establishment of the said proposal and upon conference with
the banking institutions of Canada, that legislation may be enacted to
carry out the results of the said conference and such scheme as may be
evolved.”
Notice having been given, on motion of Mr. McQuarrie, second by Mr.
Maclean:
Ordered,—“‘That the Deputy Minister of Finance or some other
official of the Department of Finance to be delegated by him, be requested
to appear before this Committee and give evidence as to the present
system or rediscounting and generally as to the relations and dealings
between the Department of Finance and the Banks and the operation
of the Bank Act.”
By unanimous consent, on motion of Mr. Coote, seconded by Mr. Marler:
Ordered,—“That the motion before the House for concurrence in
the Report of this Committee craving a widening of the Reference to
enable consideration of the question of the establishment of a Central
Bank, be moved next Tuesday.”
1i—I1
elxii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By unanimous consent, on motion of Mr. Irvine, seconded by Mr. Maclean:
Ordered,—‘‘That representatives of the Home Bank Depositors’
Relief Committee be heard at a date to be decided later as it is desirable
to await the arrival before the Committee of Mr. Justice McKeown’s
Report, which is expected shortly.”
Mr. Henry T. Ross, Secretary of the Canadian Bankers’ Association,
Toronto, Ontario, who was in attendance, was called, sworn gave evidence and
retired.
The Committee adjourned at 1.15 o’clock P.M. to meet again at 10 o’clock
a.m. to-morrow, Thursday, June 12, 1924.
S. R. GORDON,
Clerk of Committee.
House or Commons,
CoMMITTEE Room 429,
Tuurspay, June 12, 1924.
The Committee met at 11 o’clock a.m.
The Acting Chairman, Mr. McMaster, Presided.
Present: Messieurs Benoit, Black (Halifax), Cahill, Caldwell, Carmichael,
Chevrier, Coote, d’Anjou, Desaulniers, Descoteaux, Duncan, Elliott, Euler,
Garland, (Bow-River), Good, Harris, Healy, Hodgins, Hudson, Hughes, Irvine,
Macdonald (Pictou), Mackinnon, Maclean (York), McCrea, McKay, McMaster,
McQuarrie, Malcolm, Marler, Maybee, Miller, Morin, Rankin, Robb, Robichaud,
Ryckman, St. Pére, Sales, Sinclair (Oxford), Sinclair (Queens, P.E.I.), Speakman,
Spencer, Steedsman, Stork, Vien, Ward and Woods.—48.
After Consideration of Private Bills,—
The Clerk read the following additional Orders of Reference:
TuHurspay, June 5, 1924.
Ordered—That the said Committee be instructed to lay on the table of the House as
part of their sixth Report the minutes and proceedings of all their sittings during the present
Session prior to their adoption of the said Report.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
Wepnespay, llth June, 1924.
Ordered,—That the interim Report of the Royal Commission respecting the Home Bank
be referred to the Select Standing Committee on Banking and Commerce.
Attest.
W. B. NORTHRUP,
Clerk, House of Commons.
By unanimous consent, on motion of Mr. Irvine, seconded by Mr. Spencer:
Ordered,—That a sub-committee of five members to be selected by
the Chairman be appointed for the purpose of studying the interim Report.
on the Home Bank submitted by Mr. Justice McKeown and reporting
back to this Committee their recommendations thereon for consideration.
BANKING AND COMMERCE elxill
APPENDIX No. 1
By unanimous consent, on motion of Mr. Coote seconded by Mr. Benoit:
Ordered,—That the McKeown Report on the Home Bank be printed
aas part of our minutes of proceedings of this day. (See page xli.)
By unanimous consent, on motion of Mr. Maclean seconded by Mr. Spencer:
Ordered,—That the Postmaster General or a representative of his
Department be invited to appear before this Committee to explain the
system of Post office savings banks.
Notice of Motion
Mr. Spencer gave notice that on a subsequent date he would move the
following Resolution:
“Resolved,—That an amendment be added to Sec. 88 a S. 8. 1 by
inserting the words ‘In an amount in excess of $1,000’ after the word ‘Act’
in the second line thereof.”
Mr. George D. Finlayson, Superintendent of Insurance, Department of
Finance, Ottawa, who was in attendance gave further evidence and retired.
Mr. J. C. Saunders, Deputy Minister of Finance, who was in attendance,
was called, gave evidence and retired.
The Committee adjourned at 1.15 o’clock p.m. to meet again at 3.30 o’clock
this day.
The Committee reassembled at 3.30 o’clock p.m., the Chairman, Mr. Vien,
presiding.
Mr. J. C. Saunders continued his evidence and retired.
On motion of Mr. Spencer, Notice of Motion No. 11, being a bill entitled
“An Act to amend the Bank Act” standing in the name of the Acting Minister
of Finance was taken under consideration.
Clause 1 being under consideration at 6.10 o’clock p.m., the Committee
adjourned to meet again at 11 o’clock a.m. on Tuesday, June 17, 1924.
8. R. GORDON,
Clerk to Committee.
ene
elxiv SELECT STANDING COMMITTEE
ky 14-15 GEORGE V, A. 1924
Hovussr or Commons,
CommiIttTE&E Room No. 429,
Turspay, June 17, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Carmichael, Carruthers, Clifford, Coote, Des-
coteaux, Duncan, Elliott (Dundas), Garland (Bow River), Good, Grimmer,
Hanson, Healy, Hodgins, Hughes, Irvine, Kellner, Maclean (York), Macphaii
(Miss), McCrea, McKay, McQuarrie, Marler, Maybee, Miller, Papineau, St.
Pére, Sales, Sinclair (Queens, P.E.I.), Spencer, Steedsman, Tobin, Vien, Woods
and Woodsworth—a5.
The Chairman read to the Committee a letter he had received from Mrs.
Mary Forsythe, Coal Creek, B.C., with reference to the Home Bank and his
reply thereto.
The Chairman read to the Comittee the correspondence between the Home
Bank Depositors’ Relief Committee of Toronto and the Chairman and Clerk of
this Committee. The correspondence was ordered to be placed in the Minutes
of Proceedings of to-day and is as follows:—
(Copy)
CANADIAN PACIFIC RAILWAY CO’S. TELEGRAPH
Toronto, June 5th, 1924.
Lieut.-Col. Thos. A. Vien, K-C., M_P.,
Chairman Banking Committee, Ottawa.
The Executive Committee of the Home Bank Depositors Association desire
an opportunity to lay the facts of this matter before your committee next
Thursday or on Tuesday, Wednesday or Thursday of the week following the
earlier the date the better. We would like time for about three speakers to
be heard. Would be obliged for an early a reply as possible letter following.
(Sg¢d.) I. E. WELDON,
Sec’y. Home Bank Depositors’ Relief Committee.
BANKING AND COMMERCE elxv
APPENDIX No. 1
(Copy)
HOME BANK DEPOSITORY’ RELIEF ASSOCIATION
8 King St. West,
Toronto, Ont., June 5th, 1924.
Lieutenant-Colonel Thomas A. Vien, K.C., M.P.,
Chairman, Banking and Commerce Committee,
House of Commons,
Ottawa, Ont.
Dear Sir:
I beg to confirm telegram sent you to-day as follows:—
“The Executive Committee of the Home Bank Depositors’ Associa-
tion desire an opportunity to lay the facts of this matter before your
Committee next Thursday, or on Tuesday, Wednesday or Thursday of
the week following, the earlier the date the better. We would like time
for about three speakers to be heard. Would be obliged for as early a
reply as possible. Letter following.”
Yours truly,
(Sgd.) I. E. WELDON,
Secretary, Home Bank Depositors’ Relief Committee.
(Copy)
Night Letter
CANADIAN NATIONAL TELEGRAPHS
Orrawa, OnT., June 6, 1924.
I. E. WELpon,
Sec’ty. Home Bank Depositors’ Relief Committee
8 King Street West, Toronto.
Your telegram and letter of fifth instant addressed to Chairman Banking
and Commerce Committee will be placed before Committee at their first meeting
on Wednesday next eleventh instant and their decision communicated to you
immediately.
S. R. GORDON,
Clerk to Committee.
Night letter paid.
Charge Banking Committee.
elxvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
(Copy)
SELECT STANDING COMMITTEE ON BANKING AND COMMERCE
Mr. I. E. Wetpon, Secretary,
Home Bank Depositors’ Relief Committee,
8 King Street, West, Toronto, Ont.
Fripay, June 6, 1924.
Dear Sir:—Enclosed is confirmation of telegram sent you this evening in
reply to your telegram and letter to the Chairman of the Committee.
Immediately upon the Committee deciding on what day they can hear you
and the number of speakers I will be glad to advise you.
In the meantime, I am mailing to you as secretary of the Relief Committee
a printed copy of the evidence taken to date by the Committee; also the “Orders
of the Day” for Wednesday containing the ‘Notices of Motion’.
Yours truly,
S. R. GORDON,
Clerk to Committee.
(Copy)
Night Letter
CANADIAN NATIONAL TELEGRAPHS
Orrawa, Ont., June 11, 1924.
I. EK. Wetpon,
Secretary, Home Bank Depositors’ Committee,
8 King Street West, Toronto.
House of Commons Banking Committee to-day decided hear three repre-
sentatives your organization on a date to be decided after Committee has received
Mr. Justice McKeown’s report Stop You will be advised of date set.
S. BR. GORDON,
Clerk to Committee.
Night letter paid.
Charge Banking Committee.
(Copy)
HOME BANK DEPOSITORS’ RELIEF ASSOCIATION
8 King Street West,
Toronto, OnT., June 12th, 1924.
S. R. Gorpon, Esa.,
Clerk to Banking and Commerce Committee,
House of Commons,
Ottawa, Ont.
Dear Sir:—I beg to acknowledge receipt of your telegram of June 11th
advising us that the Committee decided to hear three representatives of the
Home Bank Depositors’ organization on a date to be decided after Committee
has received Mr. Justice McKeown’s report and that we will be advised of the
date set. :
We see by the Press that Justice McKeown’s report is now in the hands of
the Government and we presume therefore it will soon be before your Committee.
Thanking you for your prompt advice of the Committee’s decision.
Yours very truly,
(Sgd) I. E. WELDON,
Secretary, Home Bank Depositors’ Relief Committee.
BANKING AND COMMERCE elxvii
APPENDIX No. 1
CANADIAN NATIONAL TELEGRAPHS
j Orrawa, Ont., June 14, 1924.
W. T. J. Les, Esq.,
Chairman, Home Bank Depositors’ Relief Ass’n.,
8 King St. West,
Toronto.
I notice in Citizen this morning reference to your declarations of last night
that no reply had been received to the message asking if the Banking and
Commerce Committee would receive a deputation representing the Depositors.
Kindly enquire from Mr. Weldon your Secretary if he did not receive telegram
and letter dated June sixth and telegram June eleventh. We have his acknowledg-
ment dated June Twelfth. Kindly correct impression given to the press that
Committee did not answer your message.
THOMAS VIEN,
Chairman.
SELECT STANDING COMMITTEE ON BANKING AND COMMERCE
Office of the Chairman.
W. I: -T. Ls, Esq,;,
Chairman, Home Bank Depositors’ Relief Ass’n.,
8 King Street, West, Toronto, Ont.
Dear Sir,—I beg to enclose, herewith, confirmation of my telegram of
to-day. It is with some surprise that I have read in the Press this morning
that no reply had been received to the message asking if the Banking and
Commerce Committee would receive a deputation representing all the depositors.
You will find by the copy of the correspondence exchanged and which I beg to
atttach hereto, that the Committee has immediately answered your request by
wire and letter.
May I further state that the Committee has deemed it advisable to peruse
Mr. Justice McKeown’s Report before it receives you so as to be able better to
appreciate your representations when your delegation is received.
I may state that we shall endeavour to fix the 19th or 20th to receive your
delegation. The Committee will sit on Tuesday the 17th inst. and will then fix
s, date and you shall be informed immediately.
Yours truly,
_ (Sgd.) THOMAS VIEN,
Chairman.
Ottawa, Ont., June 14th, 1924.
(Copy)
CANADIAN PACIFIC RAILWAY CO’S. TELEGRAPH
Toronto, June 16-24
Lieut.-Col. Thomas Vien, K.C., M_P.,
Ottawa.
Just received your wire stop made no such declaration to press stop some
mistake stop Explain to Committee stop will be in Ottawa Tuesday morning
and will see you on arrival.
Waid. LEB.
elxviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
(Copy)
CANADIAN PACIFIC RAILWAY COMPANY'S TELEGRAPH
Toronto, Ont., June 16, 1924.
Lieut. Col. Thomas Vien, K.C., M.P.,
Ottawa,
Have been away from office owing illness past week. Just learned of news-
paper report Lee interview stating no reply received our message asking inter-
view Banking and Commerce Committee. Cannot understand this report which
we greatly regret. All our communications to you and Banking and Com-
merce Committee have received prompt and courteous reply. Will use every
effort to correct false impression.
I. E. WELDON.
Mr. W. T. J. Lee, Chairman, Home Bank Depositors’ Relief Association,
Toronto, who was in attendance addressed the Committee.
The Chairman reported that, as instructed by the Committee, he had
appointed a sub-committee of five members, viz: Messieurs Hanson, Irvine,
Malcolm, Marler and Vien, for the purpose of studying the interim Report on
the Home Bank submitted by Mr. Justice McKeown and reporting back to this
Committee their recommendations thereon for consideration.
The Chairman, for the sub-committee, reported that they had met this
morning and wished to report progress and asked leave to sit again.
Mr. Spencer moved, seconded by Mr. Healy:
“That the sub-committee on the McKeown Report be enlarged to seven
members.”
Discussion followed.
The question being put it was passed in the affirmative.
By unanimous consent, on motion of Mr. Irvine, seconded by Mr. Maclean.
Ordered,—“That this Committee hear a deputation of the Home Bank
depositors a week from to-morrow, Wednesday, June 25, 1924; and that
the sub-committee take congnizance simply of the McKeown Report
and do not hear witnesses.”
Notice of Motion
Mr. Hanson gave notice that on a subsequent date he would move the
following:
“That all honourable members be requested to give notice of pro-
posed Motions on or before Thursday, June 19, 1924; and that no notices
of motion be received by the Committee thereafter.”
_ Mr. Coote gave notice that on a subsequent date he would move the follow-
ing:
“That Section 61, sub-section 3-a, be struck out, and the following
substituted therefor:
‘50 per cent of the amount of the unimpaired paid-up capital of the
bank, and’,”
BANKING AND COMMERCE clxix
APPENDIX No. 1
Mr. Coote also gave notice that on a subsequent date he would move the
following:
“That this Committee is of the opinion that the Bank Act should
be amended to provide that the printing and issuing of bank notes should
be under the control of the Department of Finance, and that regulations
covering the printing and issuing of said notes should be in the hands
of the Department of Finance instead of the Bankers’ Association.”
Mr. Henry T. Ross, Secretary, Canadian Bankers’ Association, Toronto, who
was again in attendance was called, gave evidence and retired.
Mr. Austin Bill, Revenue Division, Post Office Department, Ottawa, who
was in attendance, was called, gave evidence and retired.
The Committee adjourned at 1.15 o’clock p.m., to meet at 11 o'clock a.m.
to-morrow, Wednesday, June 18, 1924.
S. R. GORDON,
Clerk of Committee.
HovusE or ComMons,
ComMiITTEE Room No. 429,
WepDNEspDAY, June 18, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Baxter, Bird, Bristol, Cahill, Caldwell, Carmichael,
Carruthers, Casgrain, Clark, Clifford, Coote, Crerar, Desaulniers, Descoteaux,
Duncan, Elliott (Dundas), Garland (Bow River), Good, Hanson, Harris,
Healy, Hodgins, Hughes, Irvine, Kellner, Maclean (York), Macphail (Miss),
McCrea, McMaster, McQuarrie, Malcolm, Marler, Maybee, Miller, Morin,
Papineau, Robb, Shaw, Sinclair (Oxford), Sinclair (Queens, P.E.I.), Speakman,
Spencer, Steedsman, Tobin, Vien, Ward, Woods and Woodsworth.—46.
The Chairman read letter from the Commercial Travellers’ Association
of Canada re the Home Bank and his reply thereto.
The Chairman reported that, as instructed by the Committee, he had added
the names of Messieurs Healy and Spencer to the “McKeown Report” sub-
committee; that the sub-committee had met this morning and desired to report
progress and asked leave to sit again.
Mr. Coote for Mr. McKay, chairman of the sub-committee on “Rural
Credits” reported progress and asked leave to sit again.
Notice of Motion
Mr. Maclean gave notice that on a subsequent date he would move the
following: —
“That the Ontario Provincial Government be asked to send a repre-
sentative of their Provincial Savings Branch to give this Committee
some idea of the business they are doing in that province.”
clxx SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Previous notice having been given and on motion of Mr. Hanson, seconded
by Mr. Maclean:
Ordered, “That all honourable members be requested to give notice
of proposed motions on or before Tuesday, June 24, 1924; and that no
notice of motion be received by the Committee thereafter unless by a
majority vote of two thirds of the Members of the Committee present.”
The Committee then took under consideration the Notice of Motion
on the order paper standing in the name of the Acting Minister of Finance
and entituled “Bill entituled: ‘An Act to amend the Bank Act.’ Section 56A
of the Bank Act is repealed, and the following substituted therefor. Inspection.”
Clause 1 read, amended and agreed to as follows:—
1. “The Governor in Council on the recommendation of the Minister
shall appoint a person who in his opinion has had proper training and
experience who shall be charged with the performance of the duties
hereinafter mentioned. Such person shall be designated ‘Inspector Gen-
eral of Banks.’ The Minister may direct some other such person to
temporarily perform the duties of the inspector should the inspector, by
reason of illness or other contingency, be unable to perform such duties.”
Clause 2 read and agreed to as follows:—
2. The Inspector shall hold office during good behaviour, but may
be removed from office by the Governor in Council for misbehaviour
or incapacity, inability, or failure to perform his duties properly.
Clause 3 read, amended and agreed to as follows:—
3. If the Inspector is removed from office for any of such reasons
the Order in Council providing for such removal and documents relating
thereto shall be laid before Parliament within the first fifteen days of
the next ensuing session.
Clause 4 read and agreed to as follows:—
4. The Inspector while holding office shall not perform any service
for compensation other than the service rendered by him under the pro-
visions of this section.
Clause 5 read, amended and agreed to as follows:—
5. “The Minister may appoint or employ on the recommendation
of the Deputy Minister of Finance and the inspector, such persons with
training and experience and such clerical assistants as may be deemed
necessary to carry out and give effect to the provisions of this section.
Persons so appointed or employed shall receive such salary or remun-
eration as may be fixed by the Minister.”
Clause 6 read. Clause stands for further consideration.
Clause 7 read and agreed to as follows:—
7. A copy of all reports made by the auditors of a Bank to the
General Manager and to the Directors under the next preceding section
shall be transmitted or delivered to the Minister by the auditors at the
same time as such reports are transmitted or delivered to the General
Manager and Directors.
Clause 8 read, and agreed to as follows:—
8. The ‘Inspector, or person acting under his direction, shall have a
right of access to the books and accounts, documents, ‘vouchers and
securities of the bank, and shall be entitled to require and receive from
the directors, officers and auditors of the bank such information and
explanation as he may deem necessary for the performance of his duties.
BANKING AND COMMERCE elxxi
APPENDIX No. 1
Clause 9 read. Clause stands for further consideration.
Clause 10 read and agreed to as follows:—
10. Whenever the Inspector is satisfied that a bank is insolvent he
shall report fully on the bank’s condition to the Minister and the Min-
ister may, without waiting for the bank to suspend payment in specie or
Dominion notes of any of its liabilities as they accrue, request the
Association or the President of the Association to appoint a curator
to supervise the affairs of such bank, and such request shall have the
same effect as if the bank had suspended payment in specie or Domin-
ion notes of any of its liabilities as they accrued, and a curator shall
forthwith be appointed as provided in section 117 of this Act.
Clause 11 read, amended, and agreed to as follows.
11. The Inspector shall be paid a salary fixed by the Governor in
Council on the recommendation of the Minister.
Clause 12 read and agreed to as follows:
12. All salaries, remuneration and other expenses incidental to giving
effect to this section shall be paid out of the Consolidated Revenue
Fund, and the Consolidated Revenue Fund shall be recouped after the
end of each calendar year for such outlay by an assessment upon the
banks based upon the average total assets of the banks respectively
during the year, as shown by the monthly returns made by the banks
to the Minister under section 112, and such assessment shall be paid by
the banks.
Clause 13 read. Clause stands for further consideration.
On motion of Mr. "Hanson, the Committee adjourned at 1.20 o’clock p.m.
to meet at 11 o’clock a.m. to-morrow, Thursday, June 19, 1924.
S. R. GORDON,
Clerk to Committee.
House or Commons,
CommitTTEE Room 429,
Tuourspay, June 19, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Black (Halifax), Bristol, Carmichael, Car-
ruthers, Casgrain, Chaplin, Clifford, Coote, Crearer, d’Anjou, Desaulniers, Des-
coteaux, Duncan, Elliott (Dundas), Garland (Bow River), Good, Grimmer,
Guthrie, Hanson, Healy, Hodgins, Hughes, Irvine, Jacobs, Kellner, Maclean
(York), Macphail (Miss), McCrea, McKay, McMaster, McQuarrie, Marler,
Maybee, Morin, Papineau, Rankin, St. Pére, Shaw, Sinclair (Oxford), Sinclair
(Queens, P.E.I.), Spencer, Steedsman, Tobin, Vien, Ward, Woods and Woods-
worth—47.
The Chairman reported to the Committee that the Clerk had received
from Mr. Austin Bill, Revenue Division, Post Office Department, a set of the
forms used in connection with the postal savings banks and that these would
be filed as Exhibit No. 21.
elxxii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Previcus notice having been given, Mr. Maclean moved:
“That in the opinion of this Committee the Post Office Savings
Banks’ system of Canada be extended by marking cheques against
accounts in same at the office of deposit.”
The Chairman ruled as follows:
“T have to rule that the Order of Reference to this Committee empowers us
to consider the provisions of the Bank Act; the Order reads that the Committee
‘ should be instructed to consider the provisions of the Bank Act with a view to
recommending such amendments to the Act as will better protect the interests
of depositors generally.’ Mr. Maclean’s motion would be in the form of an
amendment to the Act governing the Post Office Department; therefore I do not
believe that it falls within the scope of the Order of Reference to this Com-
mittee.”
The Chairman’s ruling was sustained.
Notice of Motion
Mr. Maclean gave notice that on a subsequent date he would move the
following, the same being a substitution for a previous Notice of Motion now
on the order paper:
“That the Ontario Provincial Government be asked to send a repre-
sentative of their Provincial Savings Branch to give this Committee
some idea of the business they are doing in that Province; and that the
Postmaster’ General of Canada be requested to attend before this
Committee.”
Notice of Motion on the order paper, standing in the name of the Acting
Minister of Finance and entituled “ Bill entituled ‘An Act to amend the
Bank Act.’ Section 56A of the Bank Act is repealed, and the following sub-
stituted therefor. Inspection.” again under consideration.
Clause 13 read, as follows:
13. All persons appointed under this section shall be officers of the
Department of Finance, but the provisions of the Civil Service Act, 1918,
shall not apply to such persons.
Mr. Shaw moved that the clause be amended by striking out the last three
words, “to such persons,” and substituting therefor the words, “except as to
necessary clerical assistance.”
The question being put on Mr. Shaw’s motion, it was negatived on division’
yeas 10, nays 27.
Clause 13 was agreed to as previously read.
Clause 6 read as follows:
6. The Inspector shall at least once in each calendar year and oftener
if considered necessary make or cause to be made an examination and
inquiry into the affairs and business of each bank, and shall, at the con-
clusion of such examination and inquiry, report thereon to the Minister.
Such examination and inquiry shall be conducted at the chief office of
the bank, or office of the General Manager if the office of the General
Manager is at a place other than the chief office of the bank, and it
shall not be necessary to conduct any part of such examination at
branches of the bank unless in the judgment of the Inspector an examina-
tion of any one or more of such branches is necessary.
aa
BANKING AND COMMERCE elxxili
APPENDIX No. 1
Mr. Robb moved that all the words after the figure “6” in the first line
be struck out and the following substituted therefor:—
6. The Inspector, from time to time, but not less frequently than
once in each calendar year shall make or cause to be made such examina-
tion and inquiry into the affairs or business of each bank as he may
deem to be necessary or expedient, and for such purposes to take charge
of the assets of the bank or any portion thereof, if the need should arise,
for the purpose of satisfying himself that the provisions of this Act have
reference to the safety of the creditors and shareholders of each such
bank are being duly observed and that the bank is in a sound finaneial
condition. The Inspector at the conclusion of each such examination
and inquiry shall report thereon to the Minister.
The question being put on Mr. Robb’s motion it was fe to in the
affirmative.
Clause 9 read, as follows:—
9. The Inspector, or person acting under his direction, shall have
power to examine under oath the general manager and any of the
other officers of the bank, and a general manager or other officer who
refuses to submit to such examination commits an offence against this
Act and is liable as provided in Section 157 of this Act.
Mr. Robb moved that all the words after the figure “9” in the first line
be struck out and the following substituted therefor:—
9. The Inspector shall have all the powers conferred upon a Com-
missioner appointed under the Inquiries Act for the purpose of obtain-
ing evidence under oath, and may delegate such powers as occasion may
require. Any person who refuses to give such evidence or to produce
any book or document material thereto when required so to do shall
be guilty of an offence against this Act.
The question being put on Mr. Robb’s motion it was agreed to in the
affirmative.
Clause 14 read, amended and agreed to as follows:—
14. Any bank or any director, president, general manager or any
officer of a bank who directly or indirectly makes a loan or grant or
gives any gratuity to the Inspector or any other person appointed or
employed under this section, and the Inspector or any such person who
accepts or receives, directly or indirectly, any such loan, grant or
gratuity, commits an offence against this Act, and is liable as provided in
section 157 of this Act, in addition to any punishment otherwise provided.
Clause 15 read, amended and agreed to as follows:—
15. The Inspector or any person appointed or employed under this
section who disclose to any other person, except the Minister and the
Deputy Minister of Finance, any information regarding a bank, its
business or affairs commits an offence against this Act and is liable as
provided in section 157 of the Act.
Clause 16 read and agreed to, as follows:—
16. Provided however that the Government shall not incur any
liability whatever to any depositor, creditor or shareholder of any bank,
or to any other person, for any damages, payment, compensation or
indemnity which he may suffer or claim by reason of this section or
anything therein contained, or by reason of anything done or omitted
to be done under the requirements thereof, or by reason of anything
elxxiv
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
omitted to be done which is hereby required to be done, or by reason of
any order or direction of the Governor-in-Council or of the Minister
in the execution or administration of the powers or any of them
by this section conferred, or by reason of any failure or omission on
the part of Governor-in-Council or of the Minister or of the Inspector,
or of any officer or employee of the Government to execute or discharge
any power, authority or duty thereunder, or otherwise by reason of any
default, negligence, mistake, error or omission in the administration or
discharge of the powers or duties which in any circumstances are by this
section intended or authorized to be executed or performed; and no such
payment, damages, compensation or indemnity, nor any claim therefor,
shall in any case be authorized, paid or entertained by the Government.
Clause 17 read and agreed to, as follows:— ;
17. This section shall come into force on the first day of October,
nineteen hundred and twenty-four, but it shall not be incumbent upon
the Inspector to examine all of the banks under the section during the
calendar year one thousand nine hundred and twenty-four.
On motion of Mr. McKay, seconded by Mr. Maclean
Ordered,—That a Report be presented to the House reading as follows:—
“That, pursuant to the Order of Reference from this House of the
31st of March, 1924, Your Committee in view of the failure of the Home
Bank, have considered the provisions of the Bank Act with a view to
recommending such amendments to the Act as would better protect the
interests of bank depositors generally, and would prevent similar
occurrences in the future:
And your committee are of the opinion that it is expedient to bring
in a measure to amend the Bank Act and they therefore recommend
that the said Act be amended as follows:
That Section 56A of the Bank Act be repealed, and the following
substituted therefor:
Inspection:
56A. 1. “The Governor in Council on the recommendation of the
Minister shall appoint a person who in his opinion thas had proper
training and experience who shall be charged with the performance of
the duties hereinafter mentioned. Such person shall be designated
“Inspector General of Banks.” The Minister may direct some other such
person to temporarily perform the duties of the inspector should the
inspector, by reason of illness or other contingency, be unable to per-
form such duties.”
2. The Inspector shall hold office during good behaviour, but may
be removed from office by the Governor in Council for misbehaviour or
incapacity, inability, or failure to perform his duties properly.
3. If the Inspector is removed from office for any such reason the
order in council providing for such removal and documents relating
thereto shall be laid before parliament within the first fifteen days of the
next ensuing session.
4. The Inspector while holding office shall not perform any service
for compensation other than the service rendered by him under the
provisions of this section.
5. “The Minister may appoint or employ on the recommendation
of the Deputy Minister of Finance and the inspector, such persons with
training and experience and such clerical assistants as may be deemed
BANKING AND COMMERCE clxxv
APPENDIX No. 1
necessary to carry out and give effect to the provisions of this section.
Persons so appointed or employed shall receive such salary or remunera-
tion as may be fixed by the Minister.”
6. The inspector, from time to time, but not less frequently than once
in each calendar year shall make or cause to be made, such examination
and inquiry into the affairs or business of each bank as he may deem to
be necessary or expedient, and for such purposes to take charge of the
assets of the bank or any portion thereof, if the. need should arise for the
purpose of satisfying himself that the provisions of this act having refer-
ence to the safety of the creditors and shareholders of each such bank are
being duly observed and that the bank is in a sound financial condition.
The inspector at the conclusion of each such examination and inquiry
shall report thereon to the minister.
7. A copy of all reports made by the auditors of a bank to the general
manager and to the directors under the next preceding section shall be
transmitted or delivered to the minister by the auditors at the same
time as such reports are transmitted or delivered to the general manager
and directors.
8. The inspector, or person acting under his direction, shall have a
right of access to the books and accounts, documents, vouchers and securi-
ties of the bank, and shall be entitled to require and receive from the
directors, officers and auditors of the bank such information and ex-
planation as he may deem necessary for the performance of his duties.
9. The inspector shall have all the powers conferred upon a com-
misioner appointed under the Inquiries Act for the purpose of obtaining
evidence under oath, and may delegate such powers as occasion may re-
quire. Any person who refuses to give such evidence or to produce any
book or document material thereto when required so to do shall be guilty
of an offence against this act.
10. Whenever the inspector is satisfied that a bank is insolvent
he shall report fully on the bank’s condition to the minister and the
minister may, without waiting for the bank to suspend payment in specie
or Dominion notes of any of its liabilities as they accrue, request the
association or the president of the association to appoint a curator to
supervise the affairs of such bank, and such request shall have the same
effect as if the bank had suspended payment in specie or Dominion notes
of any of its liabilities as they accrued, and a curator shall forthwith
be appointed as provided in section 117 of this act.
11. The inspector shall be paid a salary fixed by the Governor
in Council on the recommendation of the minister.
12. All salaries, remuneration and other expenses incidental to giv-
ing effect to this section shall be paid out of the Consolidated Revenue
Fund, and the Consolidated Revenue Fund shall be recouped after the
end of each calendar year for such outlay by an assessment upon the
banks based upon the average total assets of the banks respectively during
the year, as shown by the monthly returns made by the banks to the
minister under section 112, and such assessment shall be paid by the
banks.
13. All persons appointed under this section shall be officers of the
Department of Finance, but the provisions of the Civil Service Act, 1918,
shall not apply to such persons.
14. Any bank or any director, president, general manager or any
officer of a bank who directly or indirectly makes a loan or grant or
gives any gratuity to the inspector or any other person appointed or em-
ployed under this section and the inspector or any such person who
elxxvi
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
accepts or receives directly or indirectly, any such loan, grant or gratuity,
commits an offence against this act, and is liable as provided in section
157 of this act, in addition to any punishment otherwise provided.
15. The inspector or any person appointed or employed under this
section who discloses to any other person, except the Minister and the
Deputy Minister of Finance, any information regarding a bank, its busi-
ness or affairs commits an offence against this act and is lable as pro-
vided in section 157 of the act.
16. Provided, however, that the government shall not incur any lia-
bility whatever to any depositor, creditor or shareholder of any bank,
or to any other person, for any damages, payment, compensation, or in-
demnity which he may suffer or claim by reason of this section or anything
therein contained, or by reason of anything done or omitted to be done
under the requirements thereof, or by reason of anything omitted to be
done which is hereby required to be done, or by reason of any order or
direction of the Governor in Council or of the minister in the execution
or administration of the powers or any of them by this section con-
ferred, or by reason of any failure or omission on the part of the governor
in council or of the minister or of the inspector or of any officer or
employee of the government to execute or discharge any power, authority
or duty thereunder, or otherwise by reason of any default, negligence,
mistake, error or omission in the administration or discharge of the
powers or duties which in any circumstances are by this section intended
or authorized to be executed or performed; and no such payment, damages,
compensation or indemnity, nor any claim therefor, shall in any case
be authorized, paid or entertained by the government.
17. This section shall come into force on the first day of October,
nineteen hundred and twenty-four, but it shall not be incumbent upon
the inspector to examine all of the banks under the section during the
calendar year of one thousand nine hundred and twenty-four. (Pre-
sented to House, Friday, June 20, 1924. See pages 423, 424, 425, Votes
and Proceedings. Concurrence moved, concurred in, Monday, June 22,
1924. See page 432, Votes and Proceedings.)
“Motions on the Order Paper” being called.
No. 1, in the name of Mr. Ladner, was allowed to stand at the request of
Mr. Hanson, for Mr. Ladner.
No. 2, in the name of Mr. Ladner, was allowed to stand at the request of
Mr. Hanson, for Mr. Ladner.
No. 3. Mr. Spencer moved
“That the Bank Act be amended to provide that the moneys in the
Circulation Fund shall first be applied to the payment of the notes of a
bank which has suspended payment and that the other assets of the
bank be not applied to the payment of such notes until the moneys in
the said fund are first exhausted.”
Discussion followed.
No. 3 to stand as Notice of motion for next meeting.
_ By unanimous consent, on motion of Mr. Descoteaux, seconded by Mr.
Benoit.
Ordered,—‘That Exhibit No. 16 ‘The tragedy of artificial ‘Deflation’
be printed as an appendix to the Minutes of Proceedings.”
i
BANKING AND COMMERCE elxxvil
APPENDIX No. 1
Mr. Garland moved, seconded by Mr. Ward,
“That this Committee meet at 11 o’clock a.m. to-morrow, Friday,
June 20, 1924.”
The question being put, it was agreed to in the affirmative on division;
yeas 18, nays 9.
The Committee adjourned at 1.25 o’clock p.m. to meet again at 11 o’clock
a.m. to-morrow, Friday, June 20, 1924.
S. R. GORDON,
Clerk of Committee.
NOTE
Meeting called for Friday, June 20, 1924, was postponed until Wednesday,
June 25, 1924.
» H GORDON;
Clerk of Committee.
House or Commons,
CommitTErE Room 231,
WepNEspDAY, June 25, 1924.
The Committe met at 11 o’clock, a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Bird, Bristol, Carmichael, Carruthers, Casgrain,
Chevrier, Clifford, Coote, Crerar, d’Anjou, Descoteaux, Duncan, Elliott (Dun-
das), Elliott (Waterloo), Garland (Bow River), Good, Guthrie, Hanson, Harris,
Hatfield, Healy, Hodgins, Hudson, Irvine, Kellner, King (Huron), Ladner, Low,
Macdonald (Pictou), Maclean (York), Macphail (Miss), McKay, McMaster,
McQuarrie, McTaggart, Malcolm, Marler, Maybee, Miller, Morin, Papineau,
Power, Rankin, Robb, Ryckman, St. Pére, Sales, Senn, Shaw, Sinclair (Oxford),
Sinclair (Queens, P.E.I.), Speakman, Spencer, Steedsman, Stevens, Tobin, Vien,
Ward, Woods, Woodsworth—461.
By unanimous consent, on motion of Mr. Shaw, seconded by Mr. Spencer,
Ordered, —“That the time for receiving notices of motion be extended
until Thursday next, June 26, 1924.”
Mr. Spencer raised the question as to the scope of the Order of Reference.
Mr. Irvine also spoke on the matter. The Chairman informed the Comittee that
the Order of Reference had been referred to His Honour, the Speaker, for his
opinion.
The Committee was addressed by members of the Home Bank Depositors’
Relief Committee, and others, as follows:—
Mr. W. T. J. Lee, Chairman, Home Bank Depositors’ Relief Committee,
Toronto, Ont.; Mr. R. J. McLauglin, K.C., Toronto, Ont.; Mr. A. G. Browning,
ie. eemuiton, Ont; Mr W..W. Hailtz, Mayor, Toronto, Ont.; Mr. H. H.
Higginbotham, Calgary, Alta.; Mr. J. F. Edgar, Toronto, Ont.; M. J. T. Foster,
President, Trades and Labour Council, Montreal, P.Q.; Mr. V. A. Sinclair,
Hamilton, Ont.; Mr. R. J. Tallon, President, Federated Railway Trades,
Toronto, Ont.; Mr. A. Geo. McHugh, Ottawa, Ont.; Dr Paul Fisson, Mayor,
Tecumseh, Ont.; Mr. H. Weinfield, Montreal, P.Q.; Mr. J. H. Mitchell, Mayor,
Alliston, Ont.; Mr. T. J. Turnbull, County of Middlesex, Ont.; Mr. D. M. Eagle,
County of Essex, Ont.; Mr. J. E. Coombs, County of Simcoe, Ont.; Mr. Alfred
1—12
elxxvili SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mapes, Walkerville, Ont.; Mr. John O’Reilly, Reeve of Lindsay, Ont.; Mr. G. G.
Henderson, Mayor, Fernie, B.C.; Rev. Dr. Treacy, West Toronto, Ont.; Mr. I. E.
Weldon, Joint Liquidator, Home Bank, Toronto, Ont.
Mr. M. M. Gripstone, also spoke on behalf of the shareholders of the Home
Bank.
Mr. Robb, Acting Minister of Finance, made a brief statement.
By consent, Mr. Shaw moved, and Mr. Spencer seconded a vote of thanks
to the Committee of the Home Bank Depositors for presenting their views to the
Committee.
The motion was unanimously carried and the thanks of the Committee
tendered to the delegation by the Chairman.
The Committee adjourned at 1.35 o’clock p.m., to meet at 11.00 o’clock a.m.
to-morrow, Thursday, June 26, 1924.
S. b GORDON;
Clerk of Committee.
NOTE
Meeting called for Thursday, June 26, 1924, was postponed until Tuesday,
July 1, 1924.
8. R. GORDON,
Clerk of Committee.
Hovuse or CoMMONS,
CoMMITTEE Room 429,
Tuespay, July 1, 1924.
The Committee met at 11 o'clock, a.m.
The Chairman, Mr. Vien, presided.
Present: Messieurs Benoit, Black (Halifax), Boivin, Bristol, Caldwell,
Carmichael, Carruthers, Casgrain, Chevrier, Clifford, Coote, Crerar, d’Anjou,
Desaulniers, Descoteaux, Duncan, Elliott (Dundas), Elliott (Waterloo), Euler,
Garland (Bow River), Good, Grimmer, Hanson, Hatfield, Healy, Hodgins,
Hughes, Irvine, Kellner, Macdonald (Pictou), Mackinnon, Maclean (York),
McCrea, McKay, McMaster, McQuarrie, McTaggart, Marler, Maybee, Morin,
Papineau, Power, Rankin, Robb, St. Pére, Sales, Shaw, Sinclair (Oxford), Sinclair
(Queens, P.E.I.), Speakman, Spencer, Steedsman, Tobin, Vien, Ward, Woods,
Woodsworth—57.
The Chairman read letter received from Mr. G. T. Clarkson, liquidator of
the Home Bank, as follows:—
Toronto, June 21st, 1924.
Tuomas Vien, Esq., K.C., M.P.,
Chairman,
Select. Standing Committee on Banking and Commerce,
House of Commons, Ottawa.
Re Home Bank of Canada
Dear Sir:—
In answer to your inquiry re: 1. Total amount of deposits of the
Home Bank, 2. the proportion of deposits paid to depositors, 3. prospective
further payments to depositors, 4. collections on account of double liability,
and 5. claims against Directors of the Home Bank of Canada.
BANKING AND COMMERCE clxxix
APPENDIX No. 1
I beg to state as follows:
1. Re Total amount of deposits according to statement presented
at the time of suspension, the total claims of depositors and those who
held drafts and cheques on the Home Bank of Canada, and the banking
correspondents of such bank amounted to $15,531,552.
Since such statement was prepared, a considerable amount of deposits
has been liquidated by set-offs and as counter claims and the approximate
claims (other than in respect of circulation and amounts due to Dominion
and Provincial Governments) are as follows:
Due to depositors.. .. on ee Une Ureyaulll
Approximate amounts due to. Canadian Banks 175,000
Claims of foreign Banks.. .. .. ; ewe - 6 208,932
Drafts issued out- standing, Canadian. . Habeoidde 109,681
Drafts issued out-standing, American... .. .. .. 22,090
Rentalsand, damages, claims... .0.5 fc. 45...¢. - 15,000
Reserve for, COMEMPCOCIER Wiig <i 4 sine qiay dis, sp. 8 250,000
OUT etteeink ten Willa. ten tit te decom, MES eu
In addition to these claims, there is due to the province of Ontario,
approximatively $1,250,000; there is due for out-standing circulation,
approximatively $67,896; and to the Dominion Government ‘$49,000
which may be offset by taxes to be refunded.
2. Proportion of deposits paid to depositors—At the time of pay-
ment of the 25 per cent dividend which was declared about December
22nd, 1923, the sum of $3,453,590 was deposited with Canadian Banks
to meet 25 per cent of the claims of depositors.
Of such amount dividends have been drawn for all except $300,000
which remains uncalled for, or the subject-matter of dispute.
3. Prospective further payments to depositors—In answer to your
inquiry relative to prospective further payments to be made to depositors,
I desire to state that it is impossible at this juncture to determine what
amount will be realized from a number of important assets, and this, in
addition to the fact that litigation is pending whereunder depositors
seek to recover full payment of deposits made by them shortly preceding
the suspension, and a large number of shareholders on their part, are
also seeking to avoid payment of double liability on the ground that
shares issued to them were not legally and properly issued, makes it
completely impossible for me at this time to give you any definite in-
formation as to what the estate of the Bank will return to depositors.
A dividend of 25 per cent has already been paid to creditors, and
so far as I can see, if the estate of the Bank should meet with reasonable
success upon realization of its assets, and avoid having to repay in full
those deposits which were made shortly prior to its failure, there seems
to be a probability that the Bank will return creditors upwards of 10
per cent more, or a total of 35 per cent upon their claims.
If the depositors seeking return of moneys deposited in the Bank
shortly prior to the failure should be successful in their litigation, the
probability is that the dividend would not exceed 30 per cent. If share-
holders shall in addition avoid double liability, there is no certainty
that any further dividend beyond that already paid will accrue to
creditors.
1—12}
clxxx
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
In making these estimates, which cannot possibly be definite, I
desire to point out that the estate still owes about $68,000 on account of
circulation, approximately $1,300,000 to Dominion and Provincial Gov-
ernments, and $1,200,000 in respect of moneys borrowed from Canadian
Banks to permit the payment of the dividend of 25 per cent already dis-
bursed to creditors.
4, Collections on account of double liability: Collections to date
amount to $329,705 while the sum of $1,722,864 remains unpaid in
respect of the principal of capital stock unpaid, premiums thereon and
double liability.
As such amount of $1,722,864 upwards of $500,000 is owed by
persons who are known to be without financial responsibility while a
large portion of the balance is owing by persons whose responsibility is
questionable.
Under such circumstances, it is my opinion that the Bank cannot
rely upon a recovery of more than $300,000 to $400,000 in respect of the
double liability still unpaid.
As before mentioned, a large number of stock holders are contest-
ing liability on the ground that the shares held by them were not
legally issued, and if they shall succeed, the chances are that the Bank
may not recover more than $300,000 out of its claims. In other words
it will not get much more than the collection made to date.
5. Re: Claims against Directors: The estate has issued a writ against
Directors for the recovery of $5,000,000 in respect of misfeasance. The
right of the Bank to recover from Directors is the subject of dispute, and
if the Bank shall succeed its recovery will be limited to the value of
the assets owned by Directors. In my opinion this recovery will not
exceed more than $250,000 to $300,000.
I am sorry that I am not able to give you more definite information,
but with the value of the assets and the outcome of litigation both
uncertain, no statement accurate enough to be depended upon can be
made until the litigation is disposed of, and sufficient time has elapsed
to determine with a greater degree of accuracy what probable amount
will be realized from more important assets.
Yours truly,
(Signed) G. T. CLARKSON.
The Chairman also read letter and resolution received from the Chairman
and Counsel of the Home Bank National Depositors’ Relief Committee, as
follows:—
Orrawa, Ont., June 26th, 1924.
THomasS VIEN, Hsq., M.P.,
Chairman,
Banking and Commerce Committee, House of Commons,
Ottawa.
Re Home Bank.
Dear Mr. Vien:—
I have the honour to transmit to you a resolution unanimously
passed by the National Depositors’ Relief Committee at the meeting
held here yesterday, and would be glad should you deem it advisable to
have the same brought to the attention of your Committee.
BANKING AND COMMERCE elxxxi
APPENDIX No. 1
I am taking the liberty of transmitting a copy to the Premier and to
Mr. Robb, the acting Minister of Finance.
Thanking you for the many courtesies extended to me and the
Committee, I have the honour to be,
Yours very truly,
Ss gt ae | gL a
Charman, National Depositors’
Relief Committee.
RESOLUTION unanimously passed by the National Depositors Relief
Committee, at a meeting held at Ottawa on the 25th June, 1924.
Whereas the estimates of the Joint Liquidators of the Home Bank
of Canada show that aside from the twenty-five (25) per cent dividend
already paid, there is a possibility that another dividend may be paid
in any event not exceeding fifteen (15) cents on the dollars;
Whereas the depositors feel that they have established a just claim
upon the Government for relief by reason of losses suffered owing to the
Home Bank’s failure;
Be it resolved:
That the Government be respectfully requested to pay to the deposi-
tors sixty (60) cents on the dollar on the amount of their respective
claims, which payment the National Depositors Committee will accept
on behalf of the depositors in full of all claims for relief from the
Government;
And that in the event of the liquidators declaring a further dividend
in excess of fifteen (15) cents on the dollar, that the Government be and
is hereby subrogated in the rights of the depositors to all such further
dividends in excess of fifteen (15) cents on the dollar.
ROS MeLAUGHLIN | K:C;,
WoT sy ENE;
A. G. BROWNING, K.C.
Counsel for the National Depositors Relief Committee.
The Chairman also read letter received from the Home Bank Depositors’
Association of Calgary, which was ordered to be filed with the records of the
Committee.
The Chairman stated that the sub-committee appointed to consider the
“McKeown Report” on the Home Bank were ready to make their report, and
requested the Committee to express their wishes as to whether or not the report
should be received and discussed by the Committee in camera.
Mr. Woodsworth moved, seconded by Mr. Irvine.
“That the press be admitted to this session as has been the case at
all other sittings of the Committee.”
The question being put, it was declared lost in the negative, on division:
Yeas: 8. Nays: 17.
elxxxii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Marler, as acting Chairman, read the report of the sub-committee, on the
“McKeown Report” as follows:—
Report of the Sub-Committee appointed for the purpose of studying the
Interim Report on the Home Bank submitted by Mr. Justice
McKeown.
To The Select Standing Committee on Banking and Commerce of the
House of Commons of Canada, Ottawa, Ont.:
By unanimous consent at a meeting of the Select Standing Committee
on Banking and Commerce (hereinafter referred to as the Committee)
held on Thursday the 12th of June, 1924, it was ordered:
“That a Sub-Committee of five members to be selected by the
Chairman be appointed for the purpose of studying the Interim Report
on the Home Bank submitted by Mr. Justice McKeown, and report
back to this Committee their recommendations thereon for considera-
tion”.
At a subsequent meeting of the Committee held on Tuesday the 17th
of June, 1924, the Chairman reported that he had appointed a Sub-Com-
mittee of five members for the purpose as set out in the said order.
At the same meeting, namely, the 17th June, 1924, the Committee
subsequently resolved that the Sub-Committee referred to in the order
passed by the Committee on the 12th of June, 1924, and above quoted,
(hereinafter referred to as the Sub-Committee) be enlarged to seven
members, and at the same meeting it was also ordered as follows:
“That this Committee hear a deputation of the Home Bank
depositors, a week from to-morrow Wednesday, June 25th, 1924, and
that the Sub-Committee take cognizance simply of the McKeown
Report, and do not hear witnesses”.
Your Sub-Committee have sat from time to time, and have studied
the Interim Report on the Home Bank submitted by Mr. Justice McKeown.
Your Sub-Committee consider that the facts therein brought out
and the evidence therein referred to, clearly establish that the depositors
of the Home Bank have no claim under the law of the land for com-
pensation by the country on account of any loss they may suffer by
reason of the failure of the Home Bank.
But your Sub-Committee also consider that, in view of the repre-
sentations made to the Department of Finance in the years 1916 and
1918, the Government of the time could have made in 1916 and in 1918
an effective audit under Section 56-A of the Bank Act, and if such an
effective audit or thorough investigation into the bank’s affairs had been
made it would have resulted:—
1. The immediate liquidation of the bank, or
2. Its amalgamation with another bank, and that the effect would
have been, no loss to the depositors in 1916 or 1918.
Your Sub-Committee have studied the evidence given before the
Royal Commission by Sir Thomas White, who was then Minister of
Finance, and particularly his statements: “I would never think of put-
ting in a special auditor in a bank and taking chances, especially at a
time like that, of closing the bank;” (page 345) and further: “Under no
circumstances would I have allowed a bank to fail during the period in
question. I had many difficult and dangerous financial situations to
deal with during the War. At its outbreak, in view of the panic which
BANKING AND COMMERCE elxxxili
APPENDIX No, 1
prevailed, the Government, at my instance, placed itself behind the
banks of Canada and gave public assurance that it would loan them
such sums as they might require to meet the conditions of the War, and
would take all further steps necessary to safeguard the financial situa-
tion during its continuance;” (page 359) and further: “The action I took
was in my discretion; in exercising his discretion, a Minister must have
regards to conditions, because conditions have a direct bearing upon
the consequences attendant on his action to the bank and the general
situation. If you make a mistake in putting in an auditor, in peace time
the consequence may be a run producing little effect upon the bank; if
in war time, you may bring down the bank, and in addition you may
cause an unspeakable calamity to the country.” (page 743.)
Your Sub-Committee is not called upon to question the manner in
which Sir Thomas White made use of the powers given him, or whether
he exercised his discretion correctly or otherwise.
Your Sub-Committee consider that the facts brought out in the
lh.terim Report submitted by Mr. Chief Justice McKeown, and the
evidence therein referred to, establish that the depositors of the Home
Bank have a moral claim in equity for compensation by the country on
account of any loss they may suffer by reason of the failure of the Home
Bank.
Your Sub-Committee are also of the opinion that the Standing Com-
mittee on Banking and Commerce should recommend to the House of
Commons that the Government take into immediate consideration the
desirability of paying to the said depositors the compensation mentioned
in the foregoing paragraph, as soon as possible.
HERBERT MARLER,
Acting Chairman.
Mr. Marler moved, seconded by Mr. Spencer
“That the Report of the sub-committee as read, be adopted.”
Discussion followed.
By consent, Mr. Marler moved, seconded by Mr. Spencer,
“That the report of the sub-committee be amended by expunging
the last paragraph of their report.”
The question being put on the amendment, it was agreed to in the affirma-
tive, on division: Yeas: 29, Nays: 9.
Discussion followed.
The question being put on the main motion it was agreed to in the
affirmative on division: Yeas, 27; Nays, 11, and the Chairman ordered to
present a report to the House this afternoon embodying the principles of the
report of the sub-committee as agreed to by this Committee. (Report (No. 11)
appears on page xii.)
The Committee adjourned at 1.45 o’clock p.m. to meet at 11 o’clock a.m.
to-morrow, Wednesday, July 2, 1924.
8. R. GORDON,
Clerk of Committee.
elxxxiv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
House or CoMMons,
ComMMiITTEE Room 429
Wennespay, July 2, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present:—Messieurs: Baxter, Benoit, Bird, Black (Halifax), Bristol,
Cahill, Carmichael, Carruthers, Casgrain, Chevrier, Clifford, Coote, Crerar,
Desaulniers, Descoteaux, Duncan, Elliott (Dundas), Elliott (Waterloo), Euler,
Garland (Bow River), Good, Grimmer, Guthrie, Hanson, Harris, Healy,
Hodgins, Hughes, Irvine, Jacobs, Kellner, Ladner, McKinnon, Maclean (York),
McKay, McMaster, McQuarrie, McTaggart, Malcolm, Marler, Maybee, Mew-
burn, Miller, Morin, Papineau, Power, Robb, Robichaud, Robitaille, St. Pere,
Senn, Shaw, Sinclair (Oxford), Sinclair (Queens, P.E.I.), Spencer, Steedsman,
Stevens, Vien, Ward, Woods, Woodsworth.—61.
Mr. McKay, Chairman of the Sub-Committee on “Rural Credits’ and
“Bankruptcy”, reported for the sub-committee, as follows:—
REPORTS
SELECT STANDING COMMITTEE ON BANKING AND COMMERCE
SuB-COMMITTEE ON EMERGENCY LEGISLATION IN Respect To RuraLt CReEprTs
Your Committee on Emergency Legislation in Respect to Rural Credits
beg leave to report as follows:—
(1) That any plan devised for the purpose of giving Federal aid to the
provinces should be applicable to all of Canada;
(2) That at the present moment, in only six of the nine provinces of
Canada are there Provincial Government organizations, through which Federal
aid could be made available;
(3) That it would not be possible to create new machinery for utilizing
such aid covering the whole of Canada in time to be effective this year;
(4) In view of the foregoing, it would appear wiser for the Committee to
concentrate its attention upon the possibility of the development of a more
general scheme of a permanent character.
M. McKAY,
Chairman, Sub-Committee.
Your sub-committee also begs to recommend that the “Bankruptcy Act”
be amended as follows:
AN ACT TO AMEND THE BANKRUPTCY ACT
1. This Act may be cited as “The Bankruptcy Act Amendment Act, 1924.”
2. The Bankruptcy Act is amended by inserting after section 8 B. thereof
the following section:
_ “8C (1) Notwithstanding anything contained in this Act, if the
Lieutenant-Governor in Council of any province has authorized any
officer of the provincial government, charged under a provincial statute
BANKING AND COMMERCE clxxxv
APPENDIX No. 1
with duties which in the opinion of the Lieutenant-Governor are analo-
gous in any respect to the duties of custodian and trustee, to act as
custodian and trustee under this Act, the Official Receiver shall in the
case of an assignment by a person engaged solely in farming or the tillage
of the soil appoint such officer as custodian.”
“(2) Any officer so appointed to the office of custodian by the
Official Receiver shall thereupon in addition to such office be and be
deemed to be the authorized trustee as if appointed under subsection (1)
of section 15 of this Act, and shall continue to be the authorized trustee
until properly removed under subsection (2) of the said section 15.”
“(3) In case any such provincial officer is appointed custodian and
trustee, he shall not be entitled to be paid any remuneration as custodian
or trustee nor any of the costs enumerated as costs of custodian in Part
III of the General Rules.”
4. Section 59 of the Bankruptcy Act is hereby amended by adding thereto
the following subsection:
“(2) Paragraphs b, c,....of the preceeding subsection, shall not
apply in the case of an application for discharge by any assignor who at
the time of the authorized assignment was engaged solely in farming or
the tillage of the soil.”
This section shall remain in force for two years only.
M. McKAY,
Chairman, Sub-Committee.
“Motions on the Order Paper” having been called.
No. 3. Mr. Spencer moved:
That Section 131, subsection (a) of the Bank Act, be repealed and
the following substituted therefor:—
(In case of the insolvency of any bank)
(a) The notes issued or reissued by such Bank, intended for circula-
tion and then in circulation, together with any interest paid or payable
thereon, as hereinbefore provided, shall be redeemed out of the Bank
Circulation Redemption Fund, up to the amount of the said Fund; and
the balance of such notes, if any, then remaining unredeemed shall be a
first charge on the assets of the said Bank. If, upon the winding up of
the said Bank, and after all liabilities have been paid, there remains in
the hands of the liquidator any balance, the same shall be used to reim-
burse the said Circulation Fund by the amount contributed thereto by
the other Banks, and used thereout for the redemption of the said notes.
If the said balance remaining in the hands of the liquidator is not suffici-
ent to reimburse the said Circulation Fund by the said amount, the other
banks shall contribute thereto as provided for in Section 66 of this Act.”
Discussion followed.
The question being put, the motion was negatived on division: Yeas 20;
Nays 33; the names being called for were taken down as follows:—
Yeas: Messrs. Bird, Cahill, Carruthers, Coote, Elliott (Dundas), Garland
(Bow River), Good, Hughes, Irvine, Kellner, Maclean (York), McKay, St.
Pere, Sales, Shaw, Spencer, Steedsman, Ward, Woods, Woodsworth—20.
Nays: Messrs. Baxter, Benoit, Black (Halifax), Bristol, Carmichael, Cas-
grain, Chevrier, Crerar, Desaulniers, Descoteaux, Duncan, Euler, Grimmer,
Guthrie, Hanson, Harris, Hodgins, Ladner, Mackinnon, McMaster, McQuarrie,
McTaggart, Malcolm, Marler, Maybee, Mewburn, Miller, Morin, Power, Robb,
Robitaille Senn, Sinclair (Oxford)—323.
clxxxvi SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
No. 1. Mr. Ladner moved:
“That this Committee recommend to Parliament the elimination
from the Bank Act 1923, of all provisions relating to double liability of
shareholders and that accordingly section 125 of the said Act and other
sections relating to question of double liability be repealed.”
Discussion followed. Motion dropped by consent.
No. 2. Mr. Ladner moved:
SAVINGS DEPOSITS AND THEIR PROTECTION
“That in the opinion of this Committee the Bank Act should be
amended in order to provide for the establishment in the chartered banks
of Canada of a special savings account or other class of accounts for
savings deposits in addition to those now existing, whereby all holders of
deposits in such special savings account in any one bank, or branch there-
of, shall be protected or guaranteed against loss up to the sum of
$3,000 according to a similar principle as that now provided for in
sections 62 to 69 inclusive of the Bank Act relating to the protection of
bank notes by the establishment of a fund known as the Bank Circulation
Redemption Fund, or that such special savings account be established in
accordance with some other principle of insufance the premium of which
will be paid by the depositors or the chartered banks of Canada, or both,
or in such other manner as the committee may consider capable of giving
reasonable protection to depositors of money in savings accounts in such
sums as the committee may determine.”
Discussion followed. Motion dropped by consent.
No. 4. Mr. Hodgins moved:
“ Resolved that Section 131 of the Bank Act be amended so that
Government deposits will not have precedence over private deposits.”
Discussion followed.
Mr. Spencer moved, seconded by Mr. Garland, that the said motion be
amended by inserting the word “ federal” between the words “that” and
“ government ” in the second line thereof.
Discussion followed.
The question being put on the amendment it was negatived on division: Yeas
5; Nays 22.
Discussion followed.
The question being put on the main motion it was negatived on division:
Yeas 15; Nays 18.
No. 5. Mr. Coote moved:
“ That in the opinion of this Committee, legislation should be brought
down this session to provide for the establishment of long-term rura}
credits.”
By consent, the motion stands to be considered in connection with the
report of the sub-committee on “ Rural Credits.”
BANKING AND COMMERCE elxxxvil
APPENDIX No. 1
No. 6. Mr. Coote moved:
“That this Committee recommend an amendment to the Bank Act
which should provide that in each office of a chartered Bank in Canada,
notice should be displayed in large type in a prominent position, stating
that the Government of Canada assumes no responsibility in regard to
any moneys deposited in the said Bank.”
Discussion followed.
The motion stands for further consideration.
On motion of Mr. Chevrier, the Committee adjourned at 1.05 o’clock p.m.,
to meet at 11 o’clock a.m. to-morrow, Thursday, July 3, 1924.
S, he GORDON:
Clerk of Committee.
Hovusn or Commovys,
ComMMITTEE Room, 429,
TuHurspay, July 3, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presided.
Present: Messrs. Baxter, Benoit, Bird, Black (Halifax), Black (Yukon),
Boivin, Bristol, Cahill, Carmichael, Carruthers, Casgrain, Chaplin, Chevrier,
Clark, Clifford, Coote, Desaulniers, Descoteaux, Duncan, Elliott (Dundas),
Elliott (Waterloo), Euler, Fafard, Garland (Bow River), Good, Grimmer, Han-
son, Harris, Hatfield, Healy, Hodgins, Hughes, Irvine, Kellner, Ladner, Macdon-
ald (Pictou), Mackinnon, Maclean (York), Miss Macphail, McCrea, McKay,
McMaster, McTaggart, Malcolm, Marler, Maybee, Mewburn, Miller, Morin,
Papineau, Power, Rankin, Robb, St. Pere, Sales, Senn, Shaw, Sinclair (Oxford).
Sinclair (Queens, P.E.I.), Spencer, Steedsman, Tobin, Vien, Ward, Woods,
Woodsworth.—66.
“Motions on the Order Paper” having been called.
No..6. Mr. Coote moved:
“That this Committee recommend an amendment to the Bank Act
which should provide that in each office of a chartered Bank in Canada,
notice should be displayed in large type in a prominent position, stating
that the Government of Canada assumes no responsibility in regard to
any moneys deposited in the said Bank.”
Discussion followed. :
The question being put the motion was negatived on division: Yeas, 8;
Nays, 29.
No. 7.—Mr. Coote moved:
“That the Bank Act be amended by adding thereto as Section 113-A,
the following:—
‘There shall be posted up within 15 days from the end of each calen-
dar month in every branch of the Bank in a conspicuous place on the
premises thereof, accessible to the public, a statement signed by the Man-
ager or Acting Manager of such branch, showing the total moneys on
deposit in said branch and total loans outstanding on the last day of the
preceding month.’ ”
Discussion followed.
The question being put, the motion was negatived on division: Yeas, 6;
Nays, 33.
celxxxviii SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
No. 8—Mr. Coote moved:
“That this Committee request the permission of the House of Com-
mons to print such of its discussions as it may deem expedient.”
Discussion followed. By consent the motion was withdrawn.
No. 9.—Mr. Coote moved:
“That in the opinion of this Committee, the Banking Act should be
amended by adding a section which should provide for limitation of the
amount of a loan which could be made by any Bank to any person, firm
or corporation to an amount not exceeding 10 per cent of the paid-up
capital and reserve funds of said Bank.”
The Chairman read the following extract, from a letter from Mr. John R.
Lamb, General Manager of the Bank of Toronto, addressed to Mr. Henry T.
Ross, Secretary, The Canadian Bankers’ Association, which was ordered to be
printed in the Minutes of Proceedings of to-day.
“We ourselves extend credits which run in excess of 10 per cent of
our capital and rest account, taking no security whatever but the paper
of the borrower,—this for the reason that the business is of the very best
and security unnecessary. These borrowers would have no difficulty
whatever in obtaining similar accommodation from any bank in a position
to carry them and in the event of the provision in question being passed,
we would lose these accounts to one of the larger banking institutions.
Moreover, we have several accounts not running into quite such large
figures, but which we are satisfied would not continue with a bank not in
a position, through an enactment of this kind, to see them through should
they require temporarily at any time in the future larger credits. There
is no doubt that any sizable concern, looking to the future, would desire
to establish connections with one of the larger banks, rather than with
a bank of the size of our own, so that in the event, years later perhaps, of
requiring large credits, these could not be obtained without the difficulty
which would be met if they were carrying on business with a bank of
moderate size.
I am quite certain that this proposed limitation would work greatly
to the disadvantage of the banks of moderate size. There are factors in
the situation to-day unfavourable to the smaller and moderate sized
banks in their competition with the large institutions. This provision
would work in the same direction and almost compel amalgamations.
We have never in our own experience of over sixty years, met with
serious difficulties in connection with a large account. A certain measure
of risk may be taken with small business, but large business must be on
a safe basis.”
The Chairman also read extract from a letter from Mr. A. W. Phipps, Gen-
eral Manager, Imperial Bank of Canada, addressed to Mr. Henry T. Ross, Sec-
retary Canadian Bankers’ Association, which was ordered to be printed in the
Minutes of Proceedings of to-day.
“T cannot help putting in writing my opposition as General Man-
ager of one of the intermediate Banks to No. 9, the suggested amend-
ment providing for limitation of loans to the amount of 10 per cent of the
paid-up capital and reserves of the various Banks. I would consider such
an arrangement most unfair, as unduly favoring what might be termed
the big Banks who would, if such an amendment were made to the Bank
Act, be in a position to compete fiercely for more moderate sized accounts
BANKING AND COMMERCE elxxxix
APPENDIX No. 1
which would be all that would be left to the intermediate Banks, with the
full knowledge that the large accounts were all safely theirs through the
limitation of loans imposed by the amendment.”
By consent, the motion was withdrawn.
No. 10—Mr. Ladner moved:
“Resolved that this, Committee recommend to Parliament the estab-
lishment, in the character banks of Canada, of an additional class of
savings accounts whereby all holders of deposits, who may place their
money in such class of accounts, in any one bank or branch thereof, shall
be protected against loss up to the sum of $3,000 by the establishment of
a fund on an insurance basis, the premiums of which will be contributed
by the depositor and the bank in such proportion as may be determined
and that the Government work out the details and actuarial data necessary
for the establishment of the said proposal and upon conference with the
banking institutions of Canada, that legislation may be enacted to carry
out the results of the said conference and such scheme as may be evolved.”
By consent the motion was amended by adding the words “if practicable”
after the word “establishment” in the second line.
Discussion followed.
The motion stands for further consideration.
No. 11—Mr. Spencer moved:
“Resolved that an amendment be added to Section 88a 8. 8. 1 by
inserting the words ‘In an amount in excess of $1,000 after the word ‘Act’
in the second line thereof.”
Discussion followed. By consent the motion was withdrawn.
The Committee adjourned at 1.05 o’clock p.m. to meet at 11 o’clock a.m.
to-morrow, Friday, July 4, 1924.
SiReGORDON;
Clerk of Committee.
Houss& or CoMMoNs,
ComMiITTEE Room 429,
Fripay, July 4, 1924
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, Presided.
Present: Messieurs: Benoit, Bird, Black (Halifax), Bristol, Carmichael,
Carruthers, Casgrain, Chevrier, Clifford, Coote, Crerar, d’Anjou, Desaulniers,
Descoteaux, Duncan, Elliott (Dundas), Elliott (Waterloo), Euler, Fafard, Gar-
land (Bow River), Good, Grimmer, Hanson, Harris, Hatfield, Healy, Hod-
gins, Hughes, Irvine, Kellner, Ladner, McBride, Macdonald (Pictou), Mackin-
non, Maclean (York), McCrea, McKay, McMaster, McQuarrie, McTaggart,
Malcolm, Marler, Maybee, Morin, Papineau, Power, Rankin, Rheaume, Robit-
aille, St. Pere, Sales, Shaw, Sinclair (Oxford), Sinclair (Queens, P.E.I.), Spencer,
Steedsman, Tobin, Ward, Woods, Woodsworth.—60.
exe SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
“Motions on the Order Paper” having been called:
No. 14—Mr. Maclean moved:
“That the Ontario Provincial Government be asked to send a repre-
sentative of their Provincial Savings Branch to give this Committee some
idea of the business they are doing in that Province; and that the Post-
master General of Canada be requested to attend before this Committee.”
By consent, Mr. Maclean amended this motion to read as follows:—
“That the Ontario Provincial Government be asked to send a repre-
sentative of their Provincial Savings Branch to give this Committee some
idea of the business they are doing in that Province; and that the Post-
master General of Canada and the Deputy Minister of Finance be
requested to attend before this Committee to give evidence as to the
operations of the Postal Savings Banks and the Dominion Savings Bank.”
Discussion followed.
The question being put, the motion was negatived on division: Yeas 12;
Nays 15.
No. 10—By consent, Mr. Ladner, moved: that the motion standing in his
name be amended to read as follows:
“Resolved that this Committee recommend that the government should
study and consider the practicability of laying before parliament at a
subsequent date the establishment in the chartered banks of Canada, of
an additional class of savings accounts whereby all holders of deposits,
who may place their money in such class of accounts, in any one bank
or branch thereof, shall be protected against loss up to the sum of $3,000
by the establishment of a fund on an insurance basis, the premiums of
which will be contributed by the depositor and the bank in such propor-
tion as may be determined and that the Government work out the details
and actuarial data necessary for the establishment of the said proposal
and upon conference with the banking institutions of Canada, that legis-
lation may be enacted to carry out the results of the said conference and
such scheme as may be evolved.’
The question being put, the motion was carried unanimously, and the Chair-
man was instructed to present the Resolution to the House and the twelfth
interim Report of this Committee. (Report appears on page xiii.)
No. 15— Mr. Shaw moved:
Amend Section 36 of the Bank Act by adding thereto subsection 4, reading
as foJlows:—
“Every contract for the sale of shares in the capital stock of the
bank is a contract based upon the utmost good faith and requiring a full
disclosure of every known material circumstance; if the utmost good faith
is not obseved or if there is not a full disclosure of every known material
fact, the contract may be avoided by the party injured.”
Discussion followed.
A point of Order having been raised the Chairman ruled that the motion was
not within the scope of the Order Reference.
BANKING AND COMMERCE excl
APPENDIX No. 1
No. 16—Mr. Shaw moved.
Section 125 of the Bank Act is hereby repealed and the following
is substituted therefor :—
125. In the event of the property and assets of the bank being insuf-
ficient to pay its debts aand liabilities, or in the event that the paid-up
capital of the bank has been impaired by losses, or by the payment of
dividends or by the payment of bonus or otherwise, each shareholder of
the bank shall be liable for such deficiency or for such impairment to an
amount equal to the par value of the shares held by him in addition to
any amount not paid up on such shares.
(2) “Shareholders,” within the meaning of this section, shall include
an undisclosed principal and, to the extent of his interest, a cestui que
trust, on whose behalf or for whose benefit shares in the capital stock of
the bank are held.
(3) Subject to the two sub-sections last preceding, if the inspector
at any time by inspection or otherwise ascertains that the paid-up capi-
tal of a bank has become impaired by losses or by the payment of divi-
dends, or by the payment of bonus, or otherwise, he shall forthwith, upon
receiving the approval of the Minister, by a direction in writing addressed
to the General Manager, order such bank to restore the amount of such
impairment in the paid-up capital by making a call upon the sharehold-
ers pro rata to the amount of capital held by each; if such bank neglects
within four months after the receipt of such notice to comply with the
order of the inspector, the Minister may exercise the powers conferred
upon him by sub-section 10 of section 56-A of this Act; provided, how-
ever, that if all the subscribed stock has been fully paid up, the Directors
of the bank shall, subject to the provisions of this section, have, possess
and exercise the same powers with respect to the making of calls on shares
and the recovery and enforcement of such calls whether by suit, forfeiture,
sale or otherwise, as they now have, possess and exercise under this Act,
for the making, recovery and enforcement of calls on unpaid stock.
Discussion followed.
The motion being put it was negatived on division: The names being called
for were taken down as follows:—
Yeas: Benoit, Coote, Elliott (Dundas), Garland (Bow River), Good, Hod-
gins, Hughes, Irvine, Kellner, Maclean (York), Shaw, Spencer, Woods, Woods-
worth—14.
Nays: Black (Halifax), Bristol, Carmichael, Carruthers, Casgrain, Fafard,
Harris, Healy, McBride, Mackinnon, McKay, McMaster, McTaggart, Marler,
Morin, Papineau, Rheaume, Robitaille, St. Pere, Sales, Steedsman—21.
“The Guaranty of Bank Deposits (Submitted as Term Paper in
“Advanced Banking,” Pol. Econ. 31 Spring Quarter, 1924) University of
Chicago,” was filed as exhibit No. 24, and the Foreword and Conclusions of
same were ordered to be printed as an appendix to the Minutes of Proceedings
(See page cxxxvii.)
The Committee adjourned at 1.10 o’clock p.m. to meet at 11 o’clock a.m.
on Tuesday, July 8, 1924.
S&S. &. GORDON,
Clerk of Committee.
exci SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Housr or ComMoNs,
Committer Room 42S,
Turspay, July 8, 1924.
The Committee met at 11 o’clock a.m., the Chairman, Mr. Vien, presided.
Present: Benoit, Carmichael, Carruthers, Casgrain, Chevrier, Clark, Clif-
ford, Coote, d’Anjou, Desaulniers, Descoteaux, Duncan, Elliott (Dundas),
Elliott (Waterloo), Garland (Bow River), Good, Grimmer, Hanson, Harris,
Hatfield, Healy, Hodgins, Hughes, Irvine, Kellner, Ladner, McBride, Macdonald
(Pictou), Mackinnon, Maclean (York), Macphail (Miss), McCrea, McKay,
McMaster, McTaggart, Malcolm, Marler, Maybee, Mewburn, Millar, Morin,
Power, Rankin, Robb, Sales, Senn, Shaw, Sinclair (Oxford), Sinclair (Queens,
P.E.I.), Spencer, Steedsman, Stevens, Tobin, Vien, Ward, Woods, Woods-
worth.—57.
“Motions on the Order Paper” having been called,
No. 17—Mr. Garland moved:—
“That Subsection (f) of Section 76 of the Bank Act be amended by
striking out all the words after the word ‘ be’ in the fifth line thereof and
substituting therefor the following: ‘ without the unanimous approval of
the directors present at a regular meeting of the board or meeting specially
called for such purpose, provided that the notice calling any such regular
or special meeting shall set out specifically such aforementioned
purpose.’ ”
Discussion followed.
The question being put, it was agreed to in the affirmative, on division:
Yeas, 23; Nays, 10. (Presented to House, Wednesday, July 9, 1924. See page
508, Votes and Proceedings. See also pages 544 and 545, Votes and Proceedings.)
On motion of Mr. Kellner, it was unanimously agreed to take up the ques-
tion of “ Rural Credits” now.
a Mr. McKay moved the adoption of the report of the sub-committee, as
ollows:—
Your Committee on Emergency Legislation in respect to Rural
Credits beg leave to report as follows:—
(1) That any plan devised for the purpose of giving Federal aid to
the provinces should be applicable to all of Canada.
(2) That at the present moment, in only six of the nine provinces
of Canada are there Provincial Government organizations, through which
Federal aid could be made available.
(3) That it would not be possible to create new machinery for util-
izing such aid covering the whole of Canada in time to be effective this
year.
(4) In view of the foregoing, it would appear wiser for the Com-
mittee to concentrate its attention upon the possibility of the develop-
ment of a more general scheme of a permanent character.
M. McKAY,
Chairman, Sub-Committee.
BANKING AND COMMERCE exciil
APPENDIX No. 1
Mr. Coote moved as an amendment the following: —
That the report of the Sub-committee be not adopted, but that it
be referred back with instructions to reconsider same, and bring in the
following report: —
Your Sub-committee is impressed with the urgent necessity existing
among Canadian farmers for better, cheaper and more adequate credit
facilities, and is of opinion that pending the inauguration of a permanent
rural credit scheme, temporary relief should be given by the Dominion
Government by way of an emergency measure.
For this purpose, the following recommendations are made:—
1. “ That the Federal Government be authorized to set aside a sum
of money not exceeding $15,000,000 to be used where required for
Agricultural Credit Loans. This proposition to extend for a period of
one year as an emergency measure.”
2. “That loans be made to the Provincial Governments to be loaned
out through their existing machinery or such other machinery as they
may designate, to farmers.”
3. “ The maximum loan to any one person must not exceed $5,000.
The maximum loan not to exceed 50 per cent of the appraised value of
the land plus 25 per cent of the appraised and insured value of the
buildings.”
4.“ The rate of interest charged to the borrower shall not exceed
the cost of securing the money by the Government plus 1 per cent to
cover all charges of making loans, appraisal, registration, collections,
ete.”
5. “ All loans shall be on the amortized plan, to be amortized in a
period not exceeding 35 years.”
6. ‘The Governor General in Council may prescribe such further
conditions and regulations as may be deemed advisable for the purpose
of carrying into effect the objects herein outlined.”
Discussion followed.
The question being put on the amendment it was negatived on division:
Yeas, 18; Nays, 28. The names being called for were taken down as follows:—
Yeas: Benoit, Carmichael, Coote, Elliott (Dundas), Garland (Bow River),
Good, Hanson, Irvine, Maclean (York), Macphail (Miss), Millar, Sales, Shaw,
Spencer, Steedsman, Stevens, Ward, Woodsworth.—18.
Nays: Carruthers, Casgrain, Clark, Clifford, Desaulniers, Descoteaux,
Duncan, Elliott (Waterloo), Harris, Hatfield, Hodgins, Hughes, Kellner,
McBride, Mackinnon, McCrea, McKay, McMaster, McTaggart, Maybee, Mew-
burn, Power, Rankin, Robb, Robitaille, Senn, Sinclair (Oxford), Woods.—28.
The question being put on the main motion it was agreed to in the affirma-
tive.
On motion of Mr. McKay it was unanimously agreed to instruct the Chair-
man to present the following report on rural credits to the House:
Your Committee, pursuant to the Order of reference, dated 6th May, 1921,
reading as follows:—
Ordered—That the Report of Doctor Tory on Agricultural Credits, tabled
on the 15th April, be referred to the said Committee.
Attest.
W. B. NORTHRUP.
Clerk, House of Commons.
have had under consideration the report of Dr. Tory on Agricultural
Credits.
ais)
exciv SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Said report shows that, of the nine provinces of Canada, seven
already have on their statute books laws for the purpose of establishing
public systems of agricultural credit; and
Whereas a study of the systems existing in these provinces shows
that there is considerable variations in the systems, both as to method
and detail; and
Whereas it is the purpose of all such rural credit systems to secure,
through the better organization of security, loans for agricultural pur-
poses at better rates of interest than have been current heretofore; and
Whereas it is doubtful if this purpose could be best served by the
establishment of a Federal System operating in the above-mentioned
provinces in addition to and in competition with the systems already in
existence or in provinces where the need has not been sufficient, in the
opinion of the provincial authorities, so as to justify the establishment
of such a system; and
Whereas it would seem to be wise, both from the point of view of
efficiency and economy, if a federal system is to be established, that it
be a common system for the whole of Canada, and that, of necessity,
would entail conferences between the federal and provincial authorities;
Therefore, your Committee recommend that the investigation of the
subject be continued, in order to determine whether it is possible to
co-ordinate the various systems of rural credit now in existence into a
Federal System, applicable to the whole of Canada, and that Legislation
be prepared based on the said further investigations and calculated to
meet the credit needs of the Agricultural classes of the Dominion, and
submitted to Parliament at its next Session. (Presented to House, Wed-
nesday, July 9, 1924. See page 507, Votes and Proceedings. Concurrence
moved, concurred in, Friday, July 18, 1924. See page 648, Votes and
Proceedings.)
The Committee adjourned at 1.25 o’clock p.m., to meet at 11 o’clock a.m.,
Wednesday, July 9, 1924.
S. R. GORDON,
Clerk of Committee.
Houser or ComMMoNs,
Commirtrr Room 429,
Wepnespay, July 9, 1924.
The Committee met at 11 o’clock a.m.
The Chairman, Mr. Vien, presiding.
Present :—Messrs. Benoit, Carmichael, Casgrain, Chevrier, Clark, Clifford,
Coote, d’Anjou, Desaulniers, Descoteaux, Duncan, Elliott (Dundas), Elliott
(Waterloo), Fortier, Garland (Bow River), Good, Grimmer, Guthrie, Hanson,
Harris, Hatfield, Healy, Hodgins, Hughes, Irvine, Jacobs, Kellner, Ladner,
McBride, Macdonald (Pictou), Mackinnon, Maclean (York), Macphail (Miss),
McCrea, McKay, McMaster, McTaggart, Malcolm, Marler, Maybee, Mewburn,
Millar, Morin, Papineau, Power, Rankin, Robb, Robitaille, St. Pére, Sales, Sin-
clair (Oxford), Sinclair (Queens, P.E.I.), Spencer, Steedsman, Stevens, Tobin,
Vien, Woods.—48.
BANKING AND COMMERCE exXcVv
APPENDIX No. 1
“Motions on the Order Paper” having been called.
No. 5, Mr. Coote moved:
“That in the opinion of this Committee, legislation. should be
brought down this session to provide for the establishment of long-term
rural credits.”
Discussion followed.
The question being put it was negatived on division: Yeas 4; Nays 19.
_ Mr. Spencer raised the question as to the probable date of the Home Bank
Debate in the House.
The Chairman informed the Committee that this Debate could not possibly
be reached before Tuesday or Wednesday of next week.
No. 12, Mr. Coote moved:
“That Section 61, Subsection 3-A, be struck out and the following
substituted therefor: ‘50 per cent of the amount of the unimpaired paid-
up capital of the bank, and’.”
Discussion followed.
By consent, the motion was withdrawn.
No. 13, Mr. Coote moved:
“That this Committee is of the opinion that the Bank Act should
be amended to provide that the printing and issuing of bank notes should
be under the control of the Department of Finance, and that regulations
covering the printing and issuing of said notes should be in the hands of
the Department of Finance instead of the Bankers’ Association.”
Discussion followed.
The Committee was addressed by Mr. H. T. Ross, Secretary, Canadian
Bankers’ Association, who also answered a number of questions as to the effect
of this motion, if passed.
The question being put, it was negatived on division: Yeas, 10; Nays, 29.
No. 18, Mr. Garland moved:
“That Section 76 of the Bank Act be amended by adding thereto
Subsection (g) to Subsection 2 of said section, as follows:—
“No bank shall accept deposits payable after notice to a total
amount in excess of six times the paid-up capital of the bank provided
this clause shall become operative October 1, 1925.”
Discussion followed.
The question being put it was negatived on division: Yeas, 4; Nays, 34.
No. 19, Mr. Coote moved:
“That Section 13 of the Bank Act be amended by striking out the
words ‘ five hundred’ in the first line thereof; and substituting therefor
the word ‘ fifty.’ And by striking out the words ‘two hundred and fifty ’
ip the eighth line thereof and substituting the words therefor ‘twenty-
ve.
Discussion followed.
The question being put it was negatived on division: Yeas, 11; Nays, 29.
1—13}
exevl SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
No. 20—Mr. Coote moved:
“That Section 10 of the Bank Act be amended by striking out the
words ™ five hundred thousand’ in the second line thereof and substitut-
ing therefor the words ‘ fifty thousand.’ ”’
By Consent this Motion was withdrawn.
No. 21—Mr. Spencer moved:
“That the following words be added to Subsection 6, Section 54:—
‘ The profit and loss account shall include and show on the one part
the amount of
‘(a) Balance of profit and loss account carried forward from previous
year;
‘(b) Rebate of interest on unmatured bills as at close of previous
year;
‘(c) Gross profits, including balances of all interest, commission,
exchange and other revenue-producing accounts;
‘(d) Premium on new stock sold;
‘(e) Bad debts recovered, previously written off, and the statement
shall include and show on the other part:
‘(a) Expenses of management and operation to be itemized;
‘(b) Interest paid on deposits;
‘(c) Interest reserved on unmatured bills;
“(d) Amount written off bank premises;
‘(e) Amount transferred to appropriation account for losses;
‘(f) Amount transferred to officers pension fund;
‘(g) Sundry appropriations or disbursements not included under
foregoing heads, and to be shown in detail;
‘(h) Dividends declared (specifying number and date):
‘(7) Amount transferred to rest account;
‘(j) Balance at credit of profit and loss account.’ ”
Discussion followed.
The question being put it was negatived on division: Yeas, 12; Nays, 23.
On Motion of Mr. Irvine the Committee adjourned at 12.40 o’clock p.m.,
to meet at 11 o’clock a.m., to-morrow, Thursday, July 10, 1924.
8. R. GORDON,
Clerk of Committee.
Housr oF Commons,
CoMMITTEE Room 429,
Tuurspay, July 10, 1924.
The Committee met at 11 o’clock, a.m. The Chairman, Mr. Vien, presided.
Present; Messieurs: Benoit, Bird, Carmichael, Carruthers, Casgrain, Che-
vrier, Coote, Desaulniers, Descoteaux, Fortier, Garland (Bow River), Good, Hat-
field, Healy, Hodgins, Hughes, Laflamme, McBride, McKay, McMaster, Marler,
Morin, Power, Rankin, Rhéaume, Robichaud, St. Pére, Shaw, Sinclair (Oxford),
Steedsman, Stevens, Vien, Ward, Woods, Woodsworth.—35.
BANKING AND COMMERCE exevil
APPENDIX No. 1
After consideration of a Private Bill on the Order Paper—
On motion of Mr. McKay, seconded by Mr. Morin,
Ordered,—“ That the Tory Report on Agricultural Credit be printed
as an appendix to the Minutes of Proceedings of this Committee.”
(See page xli.)
On motion of Mr. McKay, seconded by Mr. Hatfield,
Ordered,—That the Chairman be instructed to present the followin
as the Sixteenth Report of this Committee.
“ Your Committee have had under consideration the various matters
referred to them by the Order of Reference, and have reported on same
from time to time.
Your Committee, in addition to numerous meetings of the sub-com-
mittees, have held thirty-nine sittings on twenty-seven separate days,
have heard the evidence of ten witnesses, and have had twenty-three
exhibits filed with them.
Your Committee submit herewith for the information of the House
a printed copy of their proceedings, the evidence given before the
Committee, and also certain documents submitted to the Committee as
Exhibits but not contained within the proceedings.
Your Committee recommend that the Order of Reference, Reports,
Proceedings, and the Evidence given before the Committee, together with
a suitable index to be prepared by the Clerk of the Committee, be printed
as an appendix to the Journals of the House of the present Session, and
for distribution, and that Rule 74 be suspended with reference thereto.”
(Presented to House, Thursday, July 10, 1924. See page 517, Votes and
Proceedings. Concurrence moved, concurred in, Friday, July 11, 1924.
See page 542, Votes and Proceedings.)
On motion of Mr. Benoit the Committee adjourned, to meet at the Call
of the Chair:
S. R. GORDON,
Clerk of Committee.
Hovusr or CoMMoNs,
ComMmitTtTEr Room 429,
Fripay, July 11, 1924.
The Committee met at 11 o’clock, am. The Chairman, Mr. Vien, presided.
Present: Messieurs: Benoit, Chevrier, Clifford, Coote, Descoteaux, Elliott
(Waterloo), Fortier, Garland (Bow River), Good, Hatfield, Hodgins, Irvine,
Jacobs, McBride, Maclean (York), McKay, McMaster, Millar, Morin, Sales,
Shaw, Spencer, Steedsman, Vien, Ward, Woods, Woodsworth.—27.
Mr. McKay, Chairman of the sub-committee on “ Rural Credits,’ moved
that the Report of the sub-committee on ‘“‘ Bankruptcy,” be adopted.
Discussion followed.
On motion of Mr. MeKay seconded by Mr. McMaster, the Chairman
was unanimously instructed to present a Report to the House embodying the
Report of the sub-committee on “ Bankruptcy,” as amended, as follows:—
excvill SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Seventeenth Report
“Your Committee have had under further consideration and study the
report of Dr. H. M. Tory on ‘ Agricultural Credit,’ which was referred to them
on May 6th, 1924.”
“Your Committee find that the credit of persons engaged solely in farm-
ing the tillage of the soil is affected by certain provisions of The Bankruptcy
Act.”
“Your Committee, therefore, recommend that legislation be introduced at
the present Session of Parliament amending The Bankruptcy Act as follows:—
“ An Act to Amend The Bankruptcy Act.”
“1. This Act may be cited as ‘The Bankruptcy Act Amendment Act,
1924.’
“2. The Bankruptcy Act is amended by inserting after section 8B thereof
the following section:—
“8C (1) Notwithstanding anything contained in this Act, if the Lieuten-
ant-Governor in Council of any province has authorized any officer of the
provincial government, charged under a provincial statute with duties which in
the opinion of the Lieutenant-Governor in Council are analogous in any respect
to the duties of custodian and trustee, to act as custodian and trustee under
this Act, the Official Receiver shall in the case of an assignment by a person
engaged solely in farming or the tillage of the soil appoint such officer as cus-
todian.”
“(2) Any officer so appointed to the office of custodian by the Official
Receiver shall thereupon in addition to such office be and be deemed to be
the authorized trustee as if appointed under subsection (1) of section 15 of this
Act, and shall continue to be the authorized trustee until properly removed
under subsection (2) of the said section 15.”
“(3) In case any such provincial officer is appointed custodian and
trustee, he shall not be entitled to be paid any remuneration as custodian or
trustee nor any of the costs enumerated as costs of custodian in Part III of
the General Rules, but shall be entitled to his lawful disbursements.
“3. Section 59 of The Bankruptcy Act is hereby amended by adding thereto
the following subsection:”
“ (2) Paragraphs “b” and “c” of the preceding subsection shall not apply
in the case of an application for discharge by any assignor who at the time of
the authorized assignment was engaged solely in farming or the tillage of the
soil.” (Presented to House, Friday, July 11, 1924. See page 523, Votes and
Proceedings.)
This being the last scheduled meeting of the Committee felicitations were
exchanged before the Chair, and the various members of the Committee.
The Committee adjourned at one o’clock p.m., sine die.
8. R. GORDON,
Clerk of Committee.
cainiaiieiaiaaaei
1415 GEORGE V APPENDIX No. 1 A. 1924
MINUTES OF EVIDENCE
Hovusr or Commons,
ComMMITTEE Room 436,
Tuourspay, May 13, 1924.
The Select Standing Committee on Banking and Commerce met at 11.00
o'clock am. Mr. Vien presiding.
The Secretary: The Chairman of the Committee Hon. Mr. Mitchell, is
unable to be present this morning and I would ask the members of the Com-
mittee to nominate a vice-chairman.
Mr. Tostn: I propose that Mr. Vien, Lotbiniere, take the Chair.
Mr. Vien having taken the Chair.
The Vice-CuairMAN: The first order of business is “Communications.”
I would ask the Secretary to read the communications.
The Srcretary: The following telegram has been received.
“Cleveland, Ohio,
Hon WiC? Goot,
“Your telegram was repeated to me from New York. I shall be
glad to appear before your Committee if they want me and shall try to
arrange my time to suit their convenience. I can be reached by tele-
graph until Monday, May Twelfth at Hotel Cleveland, Cleveland Ohio.
After that date I suggest you telegraph me care American Exchange
National Bank, New York City, and message will be repeated to me as
my movements for next month are uncertain.
(Sgd.) William P. Malburn.”
There has also been received the following telegram:
“Washington, D.C.,
Hon. W. G. Mitchell.
“Chairman House of Commons, Banking Committee.
Replying your telegram seventh would suggest E. W. Stearns comp-
troller’s office, Sherrill Smith, Vice President Chase National Bank, New
York, or J. W. Pole, Chief National Bank examiner under comptroller
of the Currency. (Sed.) A. W. Mellon.”
od. _ W. Mellon.
That is a reply to a telegram which Mr. Mitchell sent asking for suggested
names of witnesses in regard to the matter of bank examination or inspection.
Perhaps Mr. Good has received other telegrams.
Mr. Goop: Yes, Mr. Chairman, I received replies from practically all the
other parties to whom I sent telegrams on instructions of the sub-committee.
I thought that the secretary would read them also. I read one at the last
meeting of the Committee from Mr. Williams, who signified his willingness to
come. I also heard from Mr. Maclean, of Portland, whose name was men-
tioned, but he replies that he will find it difficult, if not impossible to be present.
The other party was Mr. Stearns. He wired that he would be available. There
was only one other party suggested and we do not know his address. I do not
think that the secretary has heard from him yet.
2 SELECT STANDING COMMITTEE
; 14-15 GEORGE V, A. 1924
The Secretary: We have not yet had that reply.
Mr. Goon: I think that is all the information I can give the Committee
at present. I have copies of the replies in my room, and I can get them if
necessary.
The Vicr-CHairRMAN: You might hand them to the secretary.
Mr. Goon: I thought he had copies, but if not, I will furnish them to him.
The Vicr-CHAIRMAN: The second order of business is “Report of the Sub-
Committee.” I understand that the Sub-Committee has not met since our
last meeting.
The next order is “Motions.” There are a few formal motions for the con-
sideration of the Committee.
Mr. Shaw moved, seconded by Mr. Irvine that
“The Clerk be instructed to secure a sufficient number of copies
of the Bank Act for the use of the members of the Committee.”
Motion agreed to.
Mr. Coote moved, seconded by Mr. Spencer,
“That a Report be presented to the House recommending that the
Committee be given leave to have their proceedings and such evidence
as may be given before them, printed from day to day for the use of
the members of the Committee and the House, and that Rule 74 be
suspended in reference thereto.”
Motion agreed to.
The Vick-CHAmRMAN: At the last meeting of the Committee the question
of procedure was taken up, and I think the general trend of opinion was along
the lines of the following motion, which I now submit for your consideration.
Mr. Mackinnon moved, seconded by Mr. McBride,
“That the following shall be the mode of procedure for this Com-
mittee :—
1. All motions and notices of motions must be in writing.
2. Amendments to the Bank Act introduced in Committee by
members may be received as notices of motion to be discussed and not
voted upon until a subsequent meeting of the Committee. Members of
the Committee shall be furnished with copies of such amendments.
3. Non-contentious amendments to the Bank Act may be first dis-
posed of. Any amendment or clause to which there is objection stands
on the request of a Member for further consideration. Reconsideration
shall be permissable on notice of motion.”
Motion agreed to.
The next order is “ Notices of motion.” At the last meeting of the Com-
mittee it was resolved that to-day we would hear Mr. Edwards of the Finance
Department, Mr. Finlayson of the Insurance Department and Sir William
Stavert. I have been informed that Sir William Stavert is desirous of waiting
until the next sitting of the Committee before giving his evidence; therefore,
I would suggest that Sir William Stavert’s evidence be heard at the next
sitting of the Committee if that is agreeable.
Now, gentlemen, we have present Mr. Edwards of the Finance Depart-
ment, and Mr. Finlayson of the Insurance Branch of the Finance Depart-
ment. Whom do you desire to hear first?
BANKING AND COMMERCE ~— 3
APPENDIX No. 1
Mr. Suaw: Before the matter of calling the witnesses is proceeded with,
I may point out that there is a notice of motion standing in my name. It
appears on the back of the notice calling this meeting, and perhaps it would be
advisable to dispose of that in order that we may proceed with other business,
if that is agreeable to the Committee.
The Vicn-CHatRMAN: The notice of motion standing in Mr. Shaw’s name
is as follows:—
“That this Committee is of opinion that the purpose, organization
and operation of some type of properly administered Central or Reserve
Bank falls within the scope of the Reference, and that the Sub-Com-
mittee is hereby instructed to suggest to this Committee the names of
competent witnesses to give evidence on this subject.”
The question is open for discussion.
Discussion followed.
The Vice-CHaIRMAN: Gentlemen, I am only the acting Chairman of the
Committee and I think, so as not to interfere with the proceedings I will
reserve my decision until we sit again, or the Chairman, if he is here, will
render the decision. This is on the question of whether the purpose, organiza-
tion and operation of some type of properly administered central or reserve
bank falls within the scope of the reference.
Any other motions, gentlemen? I understand that Mr. Good is interested
in the calling of the witnesses, and I would like him, or any other member of
the Committee to say which witness should be examined first.
Mr. Irvine: I would suggest that it would be wise to instruct the sub-
committee to consider which of those witnesses to whom we have wired should
be called.
Mr. Goop: To facilitate matters I would move that the sub-committee be
asked to suggest or recommend the names of suitable witnesses among those
who have been communicated with at our next sitting.
Mr. Irvine: I will second that.
Mr. Goop: Unless the Committee thinks it desirable to call them im-
mediately, it might be better to have the sub-committee to consider the matter
and make a recommendation.
The Vicr-CuairMan: Your suggestion is that the names of the witnesses
available be referred to the sub-committee so that they may choose the
witnesses to be called.
Mr. Goop: And make a recommendation in that direction.
Motion agreed to.
The Vice-CHaIRMAN: Who will be the first witness?
Mr. SuHaw: I would suggest Mr. Finlayson.
The VicE-CHAIRMAN: Pending the arrival of Mr. Finlayson, we might
hear Mr. Edwards, if it is agreeable to the Committee.
George E. Epwarps: Chartered Accountant, Toronto, Ont., called.
Mr. Garuanp: Is Mr. Edwards prepared to make a brief statement in
regard to bank inspection? That would perhaps open up the subject.
The Vice-CHairMan: Mr. Edwards, of Toronto, of the firm of Edwards,
Morgan & Company, Chartered Accountants, is your witness.
i ‘ia Goop: May I ask at whose suggestion Mr. Edwards has been called
ere
[Mr. George Edwards.]
4 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Vicr-CuHarrMan: At the last sitting of the Committee, the sub-Com-
mittee was instructed to get in touch with the Finance Department and ask it to
accede to the presence here of an official of the Department who would give
evidence before the Committee concerning bank inspection. Mr. Edwards is the
adviser of the Minister when called upon to give his advice in respect of banking
and financial questions.
Mr. Irvine: I understood that Mr. Edwards was to deal with the amend-
ments to the Banking Act adopted last year, as to how they might be expected
to protect depositors.
The Vice-CHairMAN: Exactly. Mr. Edwards has not prepared a state-
ment, but he is willing to answer any questions that members would like to ask
im.
Mr. SHaw: I would suggest that Mr. Edwards make his statement as
to the operation of those amendments. He is familiar with them.
By Mr. W. F. Maclean:
Q. What do you know about the Home Bank, Mr. Edwards?
The Vice-CHarrman: I think we will make more rapid progress if Mr.
Edwards gives his statement as to the effect of the amendments to the Bank
Act.
Mr. Lapner: Perhaps Mr. Edwards might tell us what he knows to be
the effect of Section 88(a) as to notice of intention to give security, and what
effect it has had.
The Vicrk-CHatrMAN: I would suggest that the witness make a general
statement and then answer any questions that suggest themselves.
Wirness: Mr. Chairman, speaking generally with reference to the new
features of the Bank Act, which came into effect last year, I would like to say
that those provisions are generally effective at the present time, with two or
three exceptions. I will touch upon the chief amendments which, I think, were
intended to serve any purpose, or such as, I understand, this Committee has
under consideration at the moment, that is the protection of depositors or
shareholders. The first important amendment introduced into the Act last
session was Section 18 regarding the pension funds. I am unable to say whether
the banks have yet completely complied with the requirements of that section,
which was intended to secure to the employees of the banks the investment of
their pension funds in trustee securities. Some time was to be allowed to the,
banks to make the conversion, but the time was, I think, to be in the discretion
of the Minister. I have no doubt, however, that the matter is receiving, if it
has not already completely received, the attention called for.
The next important Section is Section 54.
By Mr. McMaster:
Q. Before you pass from that pension fund provision what were these
investments in before?—-A. The Merchants Bank case showed that the officers
of the Bank had invested the pension funds in shares of their own bank, and
therefore, should the necessity for enforcing the double liability arise the bank
would lose. In the case of the Merchants Bank, it meant that their funds had
been invested in shares of the Merchants Bank at around 160, and by the terms
of sale to the Bank of Montreal, they realized about 110 only. Therefore, those
entitled to the pension, I believe, would ultimately receive only about 72 per
cent of the pension that was originally intended.
By Mr. Ladner:
Q. Was there any such fund in the Home Bank?—A. There was no pension
fund in the Home Bank.
{Mr. George Edwards.]
ai
BANKING AND COMMERCE 5
APPENDIX No. 1
By Mr. Shaw:
Q. Suppose that the Merchants Bank had become insolvent, what about
the double liability on those shares? What would have been the situation?—A.
That is, of course, what suggested the amendment, the fact that those people,
the employees of the Bank, had nothing really to say in the management of the
funds that they had contributed to, in part at all events, and that the fund would
be invested without any voice of their own. It was that which suggested the
amendment last session.
By Mr. W. F. Maclean:
Q. Is the amendment being complied with?—A. As I have said, I am not
absolutely aware whether it is being completely complied with, because a certain
time was allowed to the banks for the purpose of converting those securities. If
Mr. Ross knows, he might inform the Committee, but I have not the knowledge
myself.
By Mr. McMaster:
Q. It provides for investment in the different provinces?—A. They are set
out in the Trust Companies Act of the Dominion of Canada under which the
insurance department supervises the investments of life insurance companies and
other bodies; and the nature of those securities is regulated by that Act. The
amendment was taken from that Act.
By Mr. Coote:
Q. May I ask you a question with regard to the pension fund? I understand
that it is a fact that in some of our banks the employees are compelled to pay
into the pension fund a certain percentage of their salaries, and if they leave the
bank, or are discharged from the bank within a certain number of years, they
get absolutely no return from the pension fund. Do you know whether that is a
fact, and if so, is it not working injuriously to the employees of the banks?—A.
I do not know that to be a fact, but I do know of a case where an employee had
been dismissed and has received back the money he paid in to the pension fund.
But whether that is a universal practice or not I do not know. I think that
every one who contributes to the pension fund out of his salary receives con-
sideration in the event of severing his connections with the bank; just what it
is, I cannot tell you.
Q. I think that if the Committee went into this question, it would find that,
according to the by-laws of our banks, employees are not entitled, if they leave
the bank or are discharged, to the money they have been compelled to pay
into the pension fund. This may be an opportune time to mention this fact.
By Mr. Irvine:
Q. Would you say that this amendment to the section dealing with the pen-
sion fund materially protects the depositors?—A. No, but it protects the bank
employees.
Mr. Sates: Could Mr. Ross give us any information on that subject?
The Vicr-CuairMaAn: I wish to draw the attention of the witness to the
point we are now investigating. The reference is in respect to the safety of
depositors. You will see that the answer given to Mr. Irvine does not affect the
security of the depositors. Therefore, I do not think we should insist very much
on that point.
Some hon. MemBers: Hear, hear!
(Mr. George Edwards.]
6 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Healy:
Q. Before you leave this amendment, you mentioned that the shares in
which the fund was invested would be affected by the double liability clause.
Would it be fair to say that all moneys invested in the shares of a bank out of
this pension fund would be lost, that the double liability would be lost entirely
and would be of no benefit to anyone?—A. It might not be entirely lost if the
other investments were sufficient in whole or in part to meet the double liability
call.
Q. That is not just my point. A certain amount of money was invested in
the shares of banks out of this fund. In the case of a bank failing, would the
double liability clause lose all its benefit to anyone, in so far as the money
invested in those shares is concerned?—A. If the pension fund had no other
resources, the bank would lose undoubtedly; the depositors would lose the benefit
of the double liability, but I would like to be sure as to what your question is.
Hon. Mr. Stevens: May I be permitted to interject that that type of
investment is no longer permitted.
Witness: It is not now.
Hon. Mr. Stevens: It is ancient history.
Mr. Hearty: Pardon me, it is a live issue. The whole point of double
liability is coming up. My point is, where a bank is about to fail, those who
have knowledge of the inside workings of the bank can transfer their shares,
getting rid of the double liability—transferring their shares to the owners who
have no financial responsibility. Therefore, the double liability as regards bank
shares becomes useless. The point I am making is that a bank which invests
this fund or other funds in their own shares at once gets rid of the double
liability as an asset. It is written off entirely.
Wirness: I understand your question. The pension fund is not the bank;
it is a separate fund. It is a trust. If the pension fund were the bank itself,
I think your view would be the correct one, and the benefit of the double liability
would be lost entirely. But these pension funds are not the funds of the bank.
They are shown in the bank statement as money on deposit to the extent that
they have it on deposit; but apart from that, they are separate investments
which are not disclosed in the banks’ affairs at all. Therefore, the pension fund
is a shareholder in the bank in the same sense as you or I might be a shareholder
in a bank.
An Hon. Mempber: It is illegal to do it any more, so what is the use of
talking about it?
The Vice-CHAIRMAN: I would suggest that the witness discuss the amend-
ments to the Bank Act adopted last year in respect to deposit and safety of
depositors, in so far as they affect the safety of depositors.
Mr. McMaster: Of course, the whole administration of banks affects the
safety of depositors.
Mr. Baxter: It would be a nice thing if we could hear the statement of
the witness as he sees it and have questions mercifully withheld until he is
through.
Witness: Section 54 is the one which prescribes the form of statement:
presented to the shareholders and the public. There were amendments last
year to that section which made it clearer. Just what the various classifications
would include, and to the extent that these afford additional information they
are, I should say, a moral check upon the bank in the classification and arrange-
ment of their annual statements. I would not like to say to what extent they
would contribute to the safety of depositors, other than that they furnish infor.
{Mr. George Edwards.]
BANKING AND COMMERCE ii
APPENDIX No. 1
mation and place the public in possession of information which it ought to have.
There is an important subsection in Section 54 relating to the manner in which
the bank shows the operations which it carries in the name of a controlled cor-
poration. This is subsection 4. It reads:—
“Whenever a bank carries on any part of its operations in the name
of a corporation controlled by such bank, then there shall accompany
- the statement, a further statement or statements showing the assets and
liabilities of each such corporation, and the value placed upon the bank’s
interest in the corporation; and the auditors of the bank shall, for any
purposes within the purview of this Act, be deemed auditors of such
controlled corporation, and the shareholders of the bank at every annual
general meeting shall appoint such person to act as proxy for the bank
at any and all meetings of such ‘controlled corporation as they may sce
fit.””
The banks are now submitting all statements of their controlled corporations
to their shareholders, and publishing them along with their own annual state-
ments. To that extent, there is a great deal of valuable information being
furnished which the shareholders may use in their own protection, and which
affects the depositors only in that way. If the shareholders protect themselves,
they of course protect the depositors.
The next important section in Section 56 which provides a shareholders’
audit. That Section was almost entirely reconstructed in the revision last
session, and it is operative, excepting perhaps one of the sub-sections. That
Section, in my Judgment, enlarges and defines the duties of auditors in such a
way that they cannot possibly plead any excuse for neglect to understand the
full and true position o!' a bank. They have in the end to certify in this way:
‘“(a) whether or not they have obtained all the information and
explanations they have required;
“(b) whether, in their opinion, the transactions of the bank which
have come under their notice have been within the powers of the bank;
“(c) whether, in their opinion, the statement referred to in the report
discloses the true condition of the bank;
“(d) whether the statement is as shown by the books of the bank.”
The important difference in that certificate is that the auditor states his
own unreserved opinion as to the condition of the bank which he did not do
under the Act as it previously stood. It is a clause which will suggest to every
auditor a very keen sense of responsibility for what he states in his certificate.
Sub-section 10 is a clause which is a very great advance upon the previous
Act, inasmuch as it obligates the auditors to follow the course of business from
time to time throughout the year. The previous audit clause permitted an
auditor to attend twice a year for certain purposes, and if he satisfied himself
once a year under the terms of the Act as it then stood, he had performed his
duty; but under the present Act, an auditor has not performed his duty when
he goes that far; he must go further, and must: examine the credits and the
securities and report to the directors from time to time. Each auditor is re-
sponsible for doing that, and each auditor is responsible for informing each of
the directors in writing in the way prescribed by the Act as to the condition
of those credits and anything respecting them with which he is not fully
satisfied. I believe that that is a clause which will keep the auditors on the
alert, and will be a very important provision in the interests of depositors.
By Mr. Hanson:
Q. As far as you know, how far is it effective?—A. I believe it is effective.
I have spoken to several bank auditors and I have been consulted by bank
: [Mr. George Edwards.]
8 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
auditors as to the extent of their responsibilities under that Section; and I be-
lieve that they have the keenest sense of responsibility in reference to their
duties as auditors of a bank.
By Mr Woodsworth:
Q. In your judgment, if these sections had been in effect, would it have
been possible to have had the failure of the Home Bank?—A. The Home
Bank could not have gone on for many of the later years if this Section had
been in force.
By Mr. Ladner:
Q. Could the Home Bank have started?—A. Yes, the Home Bank was
a perfectly sound institution at its inception. Its assets were in very good
shape. :
Q. Up to what period of time?—A. I think for two or three years after it
started its business.
By Mr. Woodsworth:
Q. Under these regulations, how soon would irregularities or weaknesses
have been discovered?—A. I should say that the weaknesses could have been
discovered within a few months after they had developed in the management
of the bank. They might not have impressed the auditor at that early stag:
with the seriousness of them, or what they might possibly develop into; but
to any thoughtful man who saw what occurred in the early history of the
Home Bank, I think it would be inconceivable that under these audit clauses
as they stand to-day, the matter could have gone unreported.
By Hon. Mr. Stevens:
Q. In other words, it would not have developed?—A. It would not have
been allowed to develop. The logical consequence of an auditor knowing the
circumstances would be a house-cleaning.
By Mr. Woodsworth:
Q. Do you think that this gets behind a mere book audit?—-A. Absolute-
ly.
By Mr. McQuarrie:
Q. Would you suggest any further safeguards?—A. I will give you my
views upon that. I will call attention to subsection 9 of Section 56, which reads
this way :—
“The Minister may from time to time require that the auditors
of a bank shall report to him upon the adequacy of the procedure
adopted by the bank for the safety of its creditors, and shareholders,
and as to the sufficiency of their own procedure in auditing the affairs of
the bank; and the Minister may at his discretion enlarge or extend the
scope of the audit, or direct that any other or particular examination be
made or procedure established in the particular case as the public interest
may seem to require.
My general observation about that subsection is that it is very broad, and
under it the power of the Minister to require of the auditors the information
which he desires is not limited at all. It may go into the very depth of the
banking procedure, the way the directorate function, the way the inspection
department functions, and the way the accounts are brought in and co-ordinated.
In fact, there is nothing in that subsection which is outside of the scope of action
py the Minister in the manner provided by the subsection itself.
[Mr. George Edwards.)
BANKING AND COMMERCE 9
APPENDIX No. 1
By Mr. Shaw:
Q. Is that a new subsection?—A. Yes.
Mr. WoopswortH: Under the preceding regulations the Minister had con-
siderable power. Has the public any guarantee that the power of the Minister
will be exercised, and that the audits will be more careful than those in the
past?
By Mr. McQuarrie:
Q. Do I understand that you will answer the question which I asked, later
on? You started to answer my question as to whether you would suggest any
further safeguards, and you referred to subsection 9, which we already have.
—A. To answer your question, sir,—and I was leading up to it—I would say
that the further suggestion would be that action is possible by the Minister and
could be made effective at the discretion of the Minister. It would be quite a
possible thing for the Department of Finance, through the Minister, to obtain
any information he desired, or to impose upon the bank any additional con-
dition as to procedure which would tend to increase the security of the depositors
of the bank.
By Mr. McQuarrie:
Q. We already have that. My question was whether anything should be
added in this section which might be more satisfactory. For instance, I was
thinking about Government inspection, whether this private inspection or audit
is satisfactory, or whether it would be better to have a complete system of
Government inspection—A. Well, Government inspection, I think, would not
be an improvement upon the present internal system of inspection of the banks,
if the result of that internal inspection is co-ordinated and made available to
the Minister, so that he may take proper action thereon in an emergency.
By Mr. Irvine:
Q. In view of the fact that this clause under discussion is left entirely to
the discretion of the Minsiter, would you suggest that it would be better to
have some additional protection to the depositors. Of course I am only speak-
ing of possibilities, and this does not apply to the history of Canada so far, but
the Labour Party may come into power and we might have a Minister without
any discretion. In view of that possibility as to the protection of depositors,
at the discretion of a discretionless Minister, what do you suggest?—-A. That is
the way the Act stands at the present time.
By Mr. Maclean:
Q. Have they Government inspection in the United States?—A. They have.
Q. How soon does it function or have they such inspection all the time?—
A. In the United States the National Banks are inspected twice a year by the
officers of the comptrollers of the currency. So far as I know, there is no
internal inspection because there are practically no branches amongst the
National Banks, and therefore, the executive has immediate oversight of
everything they require to know.
Q. I notice in the United States that when banks are in trouble the
Government inspector is in there the next day?—A. I don’t know about that.
I think perhaps it is the attendance of the Government inspector which brings
the trouble.
Mr. MacLean: But he goes into possession the next day.
. [Mr. George Edwards.]
10 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Ladner:
Q. On that question of inspection and responsibility; do you not think
that a certain kind of inspection of the larger accounts at the Head Office with
a direct responsibility to the Government would be effective in the manner
that the present system is not effective?—A. An inspection system, in my
opinion, is merely an inspection of certain accounts. It would be the inspec-
tion generally of all the accounts, or at least information which would be
satisfactory as to all the accounts, and then the resolving of all the information
into a statement, which would test, by its results, the solvency or otherwise
of the bank, or the position of the bank.
Q. But that is perfection. Take a practical situation such as we have. Is
it not a fact that the inspection of the large accounts at the Head Office,
especially with respect to their value and security, would have avoided bank
failures and difficulties which have actually occurred? That is, inspection by
the Government and responsibility to some other than the bank or interested
parties?—A. Surely, but inspection of the Head Office will disclose nearly all
the trouble, and, therefore, an inspection of the securities at Head Office
would be an effective step.
Q. Well, Mr. Edwards, you have a lot of experience on these banking
questions, and we had the benefit of your advice last year, and this is a very
important question to the country. I am asking you, as an expert, for your
opinion—whether or not you do not think it would be advisable to have a
system of Government inspection of the larger accounts at the Head Office put
into force immediately, and if we can advance or improve upon that system,
we can do it later on.
Mr. MacLean: That is the point.
The Witness: My views last session—
By Mr. Ladner:
Q. What is your opinion now, in view of your experience last session and
the failure of the Home Bank?
Mr. MacLean: In view of the present situation.
The Wirness: The inspection of large accounts by Government inspectors
would, I think, be very useful.
Mr. MacLean: That is the point.
By Mr. Ladner:
Q. Would you, as an expert accountant on banking, advise the Govern-
ment to institute such a system at the present time, at this session of Parlia-
ment?—A. I do not think I would advise them to institute that system at the
present time until the efficacy of the sections provided in the present Act have
been thoroughly tested out.
Mr. MacLean: And a horrible example occurring in the meantime.
By Mr. Ladner:
Q. Then, as I understand it, you think a system of inspection which is
responsible to the management of the bank is as effective as a system of
inspection which has its responsibility to the Government, and in that way
to the public?—A. If the nature of the inspection is known to the Government.
By Mr. Ward:
What do you mean by “Government ”?—A. The Minister, in this case.
I should have said the Minister. If the Minister, in the exercise of his dis-
cretion, will inform himself as he has the right to do, as to the character of the
inspection carried on—
[Mr. George Edwards.]
BANKING AND COMMERCE 11
APPENDIX No. 1
Br. Mr. Ladner:
_ Q. What opportunity has the Minister to inform himself excepting through
his officials?—A. He may require the auditors of banks individually and
collectively to report to him.
Q. Would it not be far more effective, instead of having that uncertain dis-
cretionary power to be exercised, often when the horse is gone, to have a
certain responsibility which would automatically work year in and year out?
As an expert, is it not better for you to create safeguards in the most effective
manner?—A. If imposed upon the present internal inspection system of banks
that information be furnished by the management to the auditors, and through
the auditors to the Minister, if this system is added, I would say yes, but to
take its place, I would say no.
Mr. Macityan: Why not say “The Government may at certain times do
so and so”?
By Mr. Ladner:
Q. It seems to me the most useful way to get results is to pursue your
point to the end and arrive at a definite conclusion. The conclusion I want
is this. Is it in the interest of the banks and the public at the present time,
in view of what has happened, that we should create a Government system of
inspection of the larger accounts at Head Office, making a direct responsibility
from the. bank to the Government instead of from the bank to its own manage-
ment, even though there is, in that last system, a discretionary power for the
Minister, under the present Act?—A. I think there should be some form of
inspection or means of obtaining information which would give the Minister a
better knowledge as to the position of the larger accounts.
Q. Would you make that a system that would work automatically, that
would be imperative or mandatory under the Act, or would you make it dis-
cretionary ?—A. Well, I think it should be done, but my opinion has been that it
could be done under the Act as it stands.
Mr. Macigean: It must be done; that is the point.
Mr. Lapner: My point is this: would not it be better to have a pro-
vision which would say “This inspection shall take place at periodical in-
tervals”, so that the Minister would not have any discretion at all.
Mr. Macuean: And save a responsibility he does not like to assume.
By Mr. McQuarrie:
Q. Does this sub-section depend upon the Minister who happens to be
there and upon the manner in which he exercises his discretion? The question
I asked you in the first place was whether you had anything to suggest. I
wanted to ascertain if you are satisfied with the law that the House passed
last year? Of course as a member of this Committee I can say that I did not
have full information as to the banking conditions in this country, and I have
a different aspect this year after the Home Bank inquiry, and certain incidents
which have happened. I feel that a great deal of information was deliberately
concealed last year from this Committee, and the reason I asked you this
question was because I assume you have a lot of information which you did not
have last year. Now, in view of the developments which have taken place,
don’t you think something can be done to improve conditions, and if so, what
do you suggest?—A. I think the powers contemplated by subsection 9 should
be put in more definite shape.
[Mr. George Edwards.]
1—14
12 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Hanson:
Q. What do you mean by that?—A. I mean that to follow up the system
of inspection which comes under the review of the auditors should, as the logical.
sequence, be made in some way compulsory—
Mr. Mactean: Government inspection.
The Witness: —a compulsory action by the Minister.
Mr. Baxrer: As a matter of fact, this subsection 56 does not provide,
unless the Minister especially requires it, the transmission to him or the
Department of any reports made by the auditors.
The Wrrness: It does not unless the Minister requests it.
By Mr. Baxter:
Q. How would you view it if the auditors were required to send a copy of
their reports thus made not merely to the shareholders or directors, but to the
Minister? He personally woud not go over them, but someone in the Depart-
ment would do that, and this is merely a danger signal—A. You refer to the
reports under the next following subsection?
Q. Under subsection 10 of section 56?—-A. The annual report is sent to
the Minister. That is necessary.
Q. But I have particularly in mind the information that might be gathered
under subsection 10.—A. I agree with you.
Mr. Maciran: Should that not be by a straight Government inspector,
who goes in and gets it and lets the public know?
Mr. Baxter: How much more would he do than the people appointed by
the shareholders, who have these duties under the Act?
Mr. Macuean: They have not done it in the past.
Mr. Baxter: It was never their duty in the past, until the change in the
law last year.
The Witness: The auditors have a very much larger sense of their respon-
sibility now. They have certain definite duties prescribed. I would say in reply
to Mr. Baxter’s question that a copy of these reports sent to the directors should
be sent to the Minister.
Mr. Baxter: Whether sent to the directors or the shareholders a copy
should be sent to the Minister.
Mr. Maciean: The Minister might not act. That is what the public want;
they want an official who will go and find out the facts at an early time, and
he says ‘“ Government inspection.”
The Vice-CHaAtmRMAN: I would suggest that you put the question to the
witness and that we listen to his answers.
By Mr. Ladner:
Q. May I conclude from your answer that you are of the opinion that a
system of obligatory governmental inspection of the larger accounts at the Head
Offices should be put into force?—-A. It depends on what you mean by that, Mr
Ladner. I would say that the Minister should avail himself of all the means
of obtaining information which he has now, the inauguration of an Inspection
Department for the purpose of carrying out at first hand that idea. But I am
afraid that it would involve a number of other difficulties.
Q. Then you are not in favour, or, as an expert, would not be in favour of
advising the Government to put into force now a system of Government inspec-
tion of Head Office accounts, leaving aside the ideas of the Minister exercising
discretionary power, but making it obligatory and imperative that a certain
{Mr. George Edwards.]
BANKING AND COMMERCE 13
APPENDIX No. 1
system of inspection should take place?—A. I would not be in favour, without
further study of the subject and further knowledge gained by an examination
of the situation, of advising that an independent system of governmental in-
spection should be put into force as regards the larger accounts.
Q. You have intimated that this question of bank accounting and bank
inspection—you discussed it fully last year, and you apparently are well in-
formed on the Home Bank, and you must have read a great many newspaper
comments and criticisms; do you require more information than that to come
to a conclusion?—A. I am thinking of the practical difficulties of an independent
system of Government inspection, such as I understood your question to imply.
Q. Could you work out a system of Government inspection of Head Office
accounts—of the larger accounts?—A. I think it might be done.
Q. Could you do it?—A. I think so.
Q. Would you favour doing it?—-A. If you give me time, yes.
By Mr. Maclean:
Q. How much time?
By Mr. Ladner:
Q. Yes, how much time?—A. It is not a question I can settle in a moment,
or a week or a month. It is a case of informing oneself as to the internal con-
ditions of the banks, through the means available at the present time.
Q. Could it be worked out before the end of this session of Parliament—
say at the end of June?—A. No, sir, it could not.
Mr. Suaw: I do not know whether you were going to ask him about the
amendment you submittted last year, Mr. Woodsworth.
Mr. WoopswortH: Yes, I was.
Mr. SuHaw: Then I will not discuss it.
By Mr. Shaw:
Q. Mr. Edwards, I notice that under Section 56a the Minister has discre-
tionary power to require the bank auditor, or any other auditor, to make reports
to him. That is true?—A. That is true.
Q. And that power was invoked by a former Finance Minister in con-
nection with the Home Bank?—A. Yes.
Q. In that particular case, if I read the evidence correctly, none of the
directors were fully informed as to the bank’s condition?—A. In 1916 one of
the reasons for calling the matter to the attention of the Finance Minister was
the claim that certain directors had not the information.
Q. But they subsequently acquired it?—A. They stated they were content
with what they had.
Q. And the Minister called for information under the Section, and got a
lot of information?—A. The Minister called for information as to three specific
accounts.
Q. Yes, I remember that. Let us take this situation: supposing that the
Minister exercised his discretion, as he did; supposing that the auditor of the
bank furnished the full and truthful information, indicating, we will say for
the sake of argument, that the bank was in a hopelessly insolvent condition;
what will the Minister then do? Can you point out any section of the Bank
Act which tells a Minister what to do?—A. No, I think the power is implied.
It is not stated in the Bank Act, but every one, I think, recognizes that the
Minister has very great power under such circumstances.
[Mr. George Edwards.]
1—143
14 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. What is the implied power? I cannot find any expressed power. Could
he close the bank?—A. The testimony before the Home Bank Commission was to
the effect that the other banks could have been compelled to absorb that situa-
tion.
Q. But do you not mean to suggest that the Minister of Finance could go to
the other banks and say, “You must take over this bank?”—A. That was not
my statement; that statement was made.
Q. But that was the expressed opinion that he made that statement—
Mr. Mactean: The Minister held a conference with the other banks.
By Mr. Shaw:
Q. Is it not a fact that a conference was held in connection with the Bankers’
Association and yet they would not take it over? Ag a matter of fact, there was
no power of compulsion, so far as the Minister is concerned, to direct the other
banks to take over an insolvent bank? There is no expressed power of the
Minister to do anything, is there? He cannot close the bank?—A. No.
Q. The bank could not be closed unless it actually—? A. I want to answer
your question correctly. I say there is no power given to him under the Act.
Q. Is there any power any place?—A. I believe that the Minister has the
strength and moral power to accomplish a great many things that are not
specified in the Act.
Q. Mr. Edwards, would you be in favour of a provision giving the Minister
power to close a bank if, after full investigation, he finds it should not continue?
—A. Yes, if after due investigation—
Q. You say this power he has under 56 and 56a is adequate for that pur-
pose?—A. JI think he should have the power.
Q. To save the bank and prevent further losses?—A. Yes.
Mr. SuHaw: I fully agree with you.
Mr. Maciean: But that does not deal with the question of government in-
spection, Mr. Shaw. You are side-stepping that yourself.
Mr. SHaw: No, I am not.
By Mr. Shaw:
. You will recall an amendment which was suggested last year by Mr.
Woodsworth providing for the appointment of a Government auditor who was
to be permanently on the job; a permanent official whose function it would be
to keep “tab,” as it were, on these banks, having the power to call for further
reports and go into these matters of audit properly, to direct audits, and do all
the other things which were found necessary in that connection. In other
words, it substituted for the discretionary powers of the Minister an obligation
on the part of the Government officials. Are you or are you not in favour of
such a provision?—A. With certain modifications of this amendment, I would
say I am in favour of something of that kind.
Q. What are the modifications which you suggest?—-A. The amendment
provided among other things for placing these matters before Parliament at the
opening of the session, but I do not personally think it would be in the public
interest to spread before Parliament all the information the Minister might
have obtained in the course of his inquiries through the Government auditors as
to the affairs of the bank.
Q. Any other objection, Mr. Edwards, besides that?—A. I stated at the time
that I believed it was premature. For this reason; that I hoped that the auditors
appointed under the amended section would form an organization of their own for
the purpose of supplying the Minister with the information suggested by that sub-
section, and that would be a useful and effective procedure. I have altered my
{Mr. George Edwards.]
BANKING AND COMMERCE 15
APPENDIX No. 1
opinion about that for the reason that the auditors do not all come into office at
one time; they are changing, or were changing constantly, and it was practically
impossible for them to get together in order to effect such an organization for
the purpose of assisting the Minister, so I have changed my opinon as to that.
I think, however, there should be some officer.
Q. Shall I suggest to you, Mr. Edwards, that the reservation you have made
about making this report to Parliament, with the resolution by Mr. Woodsworth
last year, would be a starting point which would meet with your approval?—A. I
think it is good as a basis.
By Mr. Maclean:
Q. Have you an Auditor General in this country?—A. We have.
Q. Are his duties imperative?—A. They are defined by the Consolidated
Revenue and Auditor Act.
Mr. Macuean: The real thing we want is an officer whose duties are im-
perative to check up the banks and do it continually. If there is anything wrong
at the early stages they will be disclosed, and the wrongs may be righted and the
bank may be saved and the public protected as well, but you will never have it
unless you have a public official.
By Mr. Hanson:
Q. Is it your opinion that no further immediate change with respect to
inspection should be made in the Act until time has demonstrated the efficacy or
in efficiency of the amendments made last year, such as 56 and 56a?—A. And a
further knowledge by the Minister in the exercise of the discretion given to him
to discover just what the best possible system of bringing it about might be.
By Mr. Ladner:
Q. You think there should not be Government inspection at all until you
have tried this discretionary scheme? That is not the answer you gave me before.
—A. IL hope I am not contradicting myself.
Q. We want to make it clear. You are an expert and we want your ideas
about which you favour and how much delay there will be?—A. Well, I don’t
believe we can evolve anything in time for the present session of Parliament;
until we ascertain what measure of inspection which will meet the circumstances.
Q. Can we do it before the next session?—A. You might have to reverse it
later on at the next session.
Q. Could you devise a scheme, or could experts devise a scheme for the next
session, say, next March?—A. Yes.
Q. Do you think that between now and the next session would be sufficient
time to carry out the experiment and find the results to which Mr. Hanson has
referred ?2—A. Yes, I think so.
Q. In one year?—A. Yes.
Q. Reference was made by the witness a minute ago—
Mr. Warp: Can this be done before we have another bank failure?
The Vick-PrEsipenT: It is now one o’clock. When shall we sit again?
I may say that the Railway Committee is sitting to-morrow.
Mr. Mactan: Let us sit to-morrow.
Mr. Goon: I think we ought to meet every day. There are a number here
who could very properly question Mr. Edwards to-morrow, who do not have
to attend the other Committee. I think we had better meet to-morrow morn-
ing.
Mr. Hanson: There is this objection, that there are gentlemen on this
Committee anxious to attend who may have to attend the other committees.
I do not think we should monopolize all the time. I suggest every other day
is quite sufficient.
(Mr. George Edwards.]
16 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. McQuarrie: It seems to me we should meet every day and go right
at this business. It is our business to look after banking, and I suggest seri-
ously we should get right down to business. We have wasted enough time
already this session. Let us stay with it.
Mr. Gartanp: I think this Committee ought to obviate as far as possible
holding sessions while the House is sitting. In order to do that it will be
necessary to sit every morning. I think the same objection Mr. Hanson has
just stated arose last year, but that did not prevent this Committee from
sitting two or three times a day.
Mr. Lapner: I move we sit to-morrow morning at eleven o’clock.
Mr. Coors: I second the motion.
(Motion agreed to.)
The Committee adjourned.
Room 231,
Houszt or CoMMOoNS,
Wepnespay, May 14, 1924.
The Select Standing Committee on Banking and Commerce met at 11.00
o’clock a.m., Mr. Vien presiding.
The Vicr-CHatRMAN: Gentlemen, yesterday I submitted to the House of
Commons the fourth report of the Committee on Banking and Commerce, which
the House was pleased to approve and concur in. The report was as follows:
“Your Committee recommend that they be authorized to have their
proceedings and such evidence as may be taken printed from day to day
for the use of members of the Committee and of the House, and that rule
74 in relation thereto be suspended.”
Under the rules of the Commission of Internal Economy, the number of
copies that can be printed is limited to 500 copies. I think that that number
would be more than sufficient for all concerned, for the members of the House
of Commons and the members of the Senate. The proceedings of yesterday are,
I understand, being printed, and will be distributed in the course of the day;
and from now on, from day to day, we shall follow the course of last year. J may
draw the attention of the Committee to this, however, that the order of the House
is for the printing only of the proceedings and evidence; discussion is not sup-
posed to be printed. If, in the course of our work, we find that on some points
discussion should be printed, we will have to make a new application to the
Speaker for leave to have it printed. Of course, everything is being taken down
in shorthand, and can be printed if the Committee decide to ask the Speaker for
the necessary permission.
Mr. Goop: How are we going to discriminate between what is evidence and
what is discussion? They are intermingled.
The Vice-CuHatrMAN: The examination of the witnesses and cross-examina-
tion is evidence, but if a discussion arises between two or more members of the
Committee, that would be discussion and not evidence. The order permitting
to print refers simply to the proceedings and evidence, to motions, notices of
motion, the order of proceedings and the evidence of witnesses, but not to discus-
sion between members of the Committee on matters that may arise.
4
BANKING AND COMMERCE 17
APPENDIX No. 1
I have the third report of the Sub-committee which is as follows:
“Your sub-committee recommend that the following witnesses be
called, viz:—
“Mr. John Skelton Williams, Richmond, Virginia, former Comptroller
of the Currency at Washington, to be requested to give evidence on
Tuesday, May 20th.
“Mr. J. W. Pole, Washington, D.C., Chief National Bank Examiner,
to be requested to give evidence on Thursday, May 22nd.
“Messrs. E. W. Sterns, of the Comptroller’s office Washington, D.C.,
and Sherill Smith, Vice-President Chase National Bank, New York, to be
requested to give evidence on a later date to be decided upon.
“Your sub-committee have instructed the Clerk of the Committee
to telegraph Messrs. Williams and Pole with the view of ascertaining
whether or not the dates recommended will suit their convenience.
(Sgd.) FRANK CAHILL,
Chairman of the sub-committee.”
Shall the report of the sub-committee be adopted?
Motion seconded by Mr. McMaster and agreed to.
The Vicr-CHAIRMAN: Motions.
Mr. Goop: Will it be necessary to pass any special motion regarding the
calling of those special witnesses?
The Vicze-CHAIRMAN: Yes.
Mr. Goop: Then I move that Mr. John Skelton Williams, Richmond,
Virginia, former Comptroller of the Currency, be requested to give evidence
before this Committee on Tuesday, May 20th, and that Mr. Williams be tendered
the usual travelling and living expenses of a witness before Parliamentary
Committees.
Mr. SHaw: I will second that.
Mr. McQuarrim: Perhaps we might get some information as to who this
gentleman is, and as to why he should be brought here. Personally, I do not
know anything about it, I have never heard of him, and I would like to know.
The Vice-Cuainman: Mr. Good, will you be good enough to explain?
Mr. Goop: This matter was fully discussed before the sub-committee yesterday,
and we had an outline of this man’s qualifications. They seemed to be satis-
factory to all the members of the sub-committee. I have not the information
available just here, but I can get it.
Mr. McQuarrie: Is this recommended by the Sub-committee?
Mr. Goop: Certainly.
The Vice-CHairMAN: May I point out, though I would not like to insist
on the point of order, that we have just unanimously adopted the report of the
Sub-committee recommending that these gentlemen be called. Now, the question
is past discussion. We have adopted that report. However, I do not wish to
insist on the observance of the rule, if Mr. McQuarrie wishes to have informa-
tion. As Mr. Good has stated, in the Sub-committee yesterday, we discussed
the qualifications of Mr. Williams. Mr. Williams was Comptroller of Currency
at the inception of the system of a Federal Reserve in 19138, and for the following
eight years he has acted in that capacity.
Mr. McQuarrie: I am satisfied if it is recommended by the Sub-committee.
I am sorry that I was a little late in coming in, and I did not know that.
Motion agreed to.
18 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
M. Irvine: I beg to move, seconded by Mr. Garland, that Mr. J. W. Pole,
Washington, D.C., Chief National Bank Examiner, be requested to give evidence
before this Committee on Thursday, May 22nd, and that Mr. Pole be tendered
the usual travelling and living expenses of a witness before Parliamentary
Committees.
Motion agreed to.
The Vicr-CHairMAN: Yesterday, the question of whether we should sit while
the House is in session arose. As a general rule, some members of the Committee
object to sitting while the House is in session, and quite properly so; but we are
now summoning witnesses from Washington and New York, and to my mind,
it would be rather unfair to ask these gentlemen to come here from 11 to 1 o’clock,
and then wait for a day or two before they complete their evidence. I think we
should ask the House for leave to sit while the House is in session, and it will be
at all times open to the Committee to decide when they shall sit or when they
shall not sit. Therefore, I think it would be advisable if we want to make any
progress and not detain these gentlemen too long, to obtain the permission from
the House to sit and than we can exercise our discretion as to whether we should
st or not.
Mr. Irvine moved, seconded by Mr. Carruthers
“That a report be presented to the House asking that the Commit-
tee be granted leave to sit while the House is in session.”
Motion agreed to.
The VicrE-CHatrMAN: I stated yesterday that I would give my ruling
this morning in respect to Mr. Shaw’s motion which appears on the order paper
as No. 1. I expect that Mr. Mitchell, the Chairman of the Committee will be
here this afternoon, and I have decided to wait until tomorrow, so that he will
give the decision himself.
Mr. W. F. Mactean: Shall we meet this afternoon?
The Vick-CHAIRMAN: No, tomorrow.
Mr. W. F. Maciean: I am agreeable to that.
The Vice-CHAIrRMAN: I shall give my ruling on Mr. Shaw’s motion to-
morrow. We shall now continue to hear the evidence of Mr. Edwards on bank
inspection.
Mr. W. F. Mactzan: May I ask when the daily reports of the proceedings
of this Committee will be distributed to members?
The Vicr-CuHairMAN: I informed the Committee before you came in that
they are being printed, and that the first daily report will be distributed in the
post office around 1 o’clock today.
Mr. W. F. Macuean: Will the printed report of the proceedings be avail-
able on the following day?
The Vicz-CHAIRMAN: From day to day.
Mr. Grorce Epwarps recalled.
Mr. Garuanp: Perhaps it would be as well if each cross-examiner would
continue his examination of the witness until he has concluded his points, and
then another examiner could put his questions.
Mr. McQuarrin: What does that mean?
The Vice-CuairMAN: We might perhaps adopt a system of cross-exam-
ination of the witnesses. The subjects covered by Mr. Edwards’ evidence, are
numerous, and it would probably be more intelligible if we first allowed him to
make his statements on one definite point and then honourable gentlemen who
wished to put questions to him on that point may cross-examine him,
{Mr. George Edwards.]
BANKING AND COMMERCE 19
APPENDIX No. 1
Mr. W. F. Macuean: And exhaust that subject before taking up another?
The Vicze-CHairMAN: And exhaust that subject. Then Mr. Edwards can
pass to another point, and the same procedure could take place. If the witness
cannot give his statement of the subject matter to which he is addressing himself,
it is pretty hard for him to give an intelligible statement. Yesterday, we
heard Mr. Edwards on the question of pension funds of bank employees, and
as soon as that is finished, we shall take up the question of bank inspection,
the amendments to the Act in respect to Bank inspection.
Mr. W. F. Macutran: I think the Chairman will protect the rights of in-
dividual members.
The Vicn-CHairMAN: Mr. Edwards was answering questions in respect
to the pension funds of bank employees.
Mr. McMaster: We passed that, Mr. Chairman, we got to inspection.
We were asking Mr. Edwards as to the practicability and wisdom of having
a Government audit.
By Mr. Woodsworth:
Q. I think mention was made yesterday of an amendment I moved last
session. There are two or three points I would like to ask about that. My
amendment last year contemplated the appointment of a Government auditor
who would have the right to make inquiries and extend the scope of the audit,
and under the Inquiries’ Act summon witnesses, and so on. Does Mr. Edwards
believe that an auditor of that kind, by calling upon the other auditors and by
examination of the books at the head office of a bank would be able to have a
sufficient knowledge to safeguard the interests of the public?—A. In most cases,
yes. He might have to supplement his inquiries through the auditors with some
personal examination, but in most cases it would be generally sufficient.
Q. It would not be necessary in your judgment to have a duplication of the
work that is now done by the bank auditors?—A. I think it would be impractic-
able and unnecessary. I think that any system of inspection under Government
control should take account of all the present existing means of furnishing masses
of information, analyse and examine them for the purpose of arriving at a con-
clusion.
Q. My amendment last year was more in the nature of being supplementary.
—A. It was of that nature.
Q. Then I think you criticized it in one regard, and that is that the last clause
provided that the Government auditor shall annually make a report in writing to
the Minister, or to whomsoever he may direct, and his findings and recommenda-
tions in respect thereto and such report shall be laid before Parliament within
twenty-one days of the commencement of. each session thereof. Yesterday you
said you thought that would be undesirable and I would like to have that ex-
plained a little more fully?—A. I think it, would be undesirable because a great
many matters might be disclosed to the Minister in a way which might not be
desirable to put before the public.
Q. Why not?—A. Well, the banks are very sensitive as to circumstances con-
nected with their affairs and the public easily misunderstands, and it might be
injurious to a bank, and work them a harm unfairly; it might not be fair to a
bank to report upon all the details of an examination of its affairs to Parliament.
Q. Would you give some illustration of what matters might be injurious to
a bank?
Mr. McMaster: That would be injurious to have disclosed.
Mr. WoopswortH: Yes.
{Mr. George Edwards.]
20 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Witness: Why, many details respecting particular loans, larger more
important loans. I think it would be very injurious to the credit of a solvent
borrower if circumstances or special inquiry relating to loans came up before
Parliament and was openly discussed.
By Mr. Woodsworth:
Q. Don’t you think it would be highly desirable with regard to these large
loans to the New Orleans Railway, for instance, and others of that kind, if they
had come before the public?—-A. Well, I, of course, think in the matter of loans of
that character it would be in the public interest that some disclosure should
be made generally, if not specifically, regarding them, but I am not thinking now
of the banks that were in the condition in which the Home Bank proved to be. I
was thinking of the perfectly solvent, sound bank, conducting its business to the
best of its ability and having on its hands loans of a sort that might begin to cause
some anxiety.
Q. But I suppose the idea of having a public audit is that the public should
be able to check the standing of the bank?—A. I don’t know quite what you
mean by a “public audit.”
Q. Well, a Government audit?—A. I would not say that a Government
audit is necessarily a wide open public matter, but something to satisfy the Min-
ister as to the condition of the bank.
Q. Then you think that the responsibility rests with the Minister?—A. He
is the one who would take action upon the bank.
Q. Last year objection was raised to the passing of this amendment on the
ground that the Government could not possibly accept this responsibility.—
A. That, of course, was for the Government to say. I do not remember what
Mr. Fielding’s attitude was exactly at that time.
Q. As an expert in these matters, can you see how the Government can
avoid responsibility?—A. If the ‘“ responsibility” means a guarantee of bank
deposits, I think it would be an undue responsibility for a government to take.
If it implied that there is a responsibility of a sort which a government might
reasonably undertake, that is, the responsibility of knowing what the condition
of the bank is and applying a remedy—a timely remedy—
Q. You have said, Mr. Edwards, that the public is unfit to Judge; that it
might be dangerous to have the public have the information. If the public
cannot get at it, that necessarily narrows the responsibility to the Minister?—
A. I think so.
Q. If his is the responsibility and the knowledge is denied to the general
public, will we not have to hold the Minister and the Government responsible?—
A. Responsibility I would say, for the applying of the remedy or taking an
action which would, for instance, close up a bank if circumstances warrant it,
but not the responsibility for a guarantee of deposits or assuming a financial
responsibility.
@. Then you would see no objection whatever to an amendment of this
character from the standpoint of it giving a greater responsibility to the Gov-
ernment?—A. I am not the judge as to whether or not the Government would
desire to assume a greater responsibility than that, but I think that is the
extent to which the Government ought to go, the responsibility for knowing
that the banks are carrying on their business in a proper way; that they would
serve this purpose, that they were solvent, and a safe depository for the people’s
money.
Q. I really fail to understand how the Government or the Minister can have
responsibility without it amounting in practice to more or less of a guarantee.
Can you explain how he can assume responsibility for the public, denying the
[Mr. George Edwards.]
BANKING AND COMMERCE 21
APPENDIX No. 1
public the right to get at the figures and yet it not partake of the nature of a
guarantee?—A. It all turns on what is meant by “responsibility.” Responsi-
bility for appropriate action under circumstances that seem to call for it,
I think, can be limited. I don’t think the word “responsibility” implies a wide
open responsibility for everything that might follow upon a situation.
Q. If the Government denies to the public the right of access to the
essential facts, ought it not to guarantee to give some corresponding guarantee
to the public?—A. I don’t think that follows. You must trust your Govern-
ment. You must trust somebody. The public cannot be the jury in all these
cases.
Q. If we trust the Government, and the judgment of the Government or the
Minister is faulty, then what?—A. I suppose judgment may be faulty, but if the
Minister is properly advised—
Mr. Macriean: “Tf”,
The Witness: —and if he adopts every reasonable precaution to obtain
information upon which he can rely, his judgment will in most cases not be
faulty in matters of this sort.
By Mr. Woodsworth:
Q. We have to provide for contingencies. What about the public?—A. The
public’s judgment may be faulty. '
Q. But the public may lose, as in the case of the Home Bank?—A. Yes.
Q. What recourse has the public against the judgment of a Minister who
may then be out of power?—A. That is rather a complex question for me to
deal with; I think it is hardly one upon which my evidence might be worth very
much.
Q. I think we might at least ask this question: What other guarantee
would you suggest? We suggest as our guarantee a wide open publicity so that
the public itself can judge, once a year—A. Let me point out that Government
inspection of national banks does not involve a guarantee of deposits.
By Mr. McMaster:
Q. Under the American system?—A. Under the American system.
By Mr. Woodsworth:
Q. That is quite true—A. Yes, I would say it is possible for the Govern-
ment to assume simply limited responsibility without being obliged to accept
responsibility for the safety of deposits.
Q. Returning to that other question. Do you think the sensitiveness
of the banks, which, of course, was clearly apparent last year—do you think that
ought to be given a great deal of weight? Ought not the welfare of the public
have greater weight?—-A. I think every discretion should be used not to
unwarrantably shake confidence in banks. The Minister should be perfectly
sure that it is necessary to do something before the public are given the
details.
Q. This suggestion of mine would call merely for an annual statement
to Parliament. It is not intended that every time a crisis arose the public should
be consulted. Do you not think it would tend to restore confidence in banks if the
public knew there was an annual statement to be given to them?—A. If you
qualify it that way I would say there are some things a Government official might
embody in a report to Parliament. I rather carried the idea of reporting to Par-
liament to its logical conclusion. That is to say, the details might be expected.
I assume Government officials might very well make some sort of formal or re-
assuring report to Parliament which might be sufficient for their purpose. It
all depends upon what is included in that report.
[Mr. George Edwards.]
22 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. This was a point raised the other day. Would you think that it would
be a distinct advance if inquiries of this kind could be made mandatory instead
of simply as it is today ?—A. I think the provision for the exercise of the powers
vested in the Minister at the present time should be made mandatory.
By Mr. Garland:
Q. Following up the questions of Mr. Woodsworth may I ask what has been
your experience with the Department of Finance? I mean, how long have you
been connected and what was the scope of your dutigs?—A. Of my duties?
Q. Yes, in connection with the work of the Department of Finance?—A. I
have been called into consultation in most of the matters where there is rela-
raiapia between the Department of Finance and the bank. J cannot enumerate
them.
Q. Just exactly what were your duties? What was the nature of your work?
—A. My first instructions from the Department of Finance in connection with
bank matters were to make an investigation of the Merchants Bank situation.
By Mr. Maclean:
Q. At what date?—A. That was in 1922. I attended at the prosecution and
gave evidence and did everything that was required of me in that regard.
By Mr. Garland:
Q. You have been more or less steadily employed by the Department ever
since?—A. On and off. I am still the head of my own business. The next duty
I was called upon to perform was to take on a study of the Bank Act with a
view of amending clauses for the purpose of, as I thought, improving it in the
light of what I had found in the Merchants Bank case.
Q. Were you aware of the condition of the Banque Nationale?—A. Only
by rumour until the month of November.
Q. Were you aware of the condition of the Home Bank?—A. No, not until
the bank closed its doors—after that.
Q. Your duties with the Department of Finance did not include in any way
your being aware of the state of these banks?—A. It was entirely in the dis-
cretion of the Ministers to direct me in any matters of that kind.
Q. Do you know anything of the condition of the bank to-day?—A. Yes.
Q. Would you be willing to give to the Committee a statement of the con-
dition of the individual banks?
Mr. Hanson: I think that is entirely without the purview of this reference.
Mr. GarLanp: That comes within the subject of inspection.
Mr. Hanson: I maintain that question is clearly out of order.
Mr. Garuanp: I am simply asking him whether should the Committee desire
the information, he is prepared to give a statement as to the condition of the
individual banks to-day. Last year we did not know the condition of the Ban-
que Nationale or the condition of the Home Bank. Perhaps some people knew
it, but the Committee was not informed. We want as far as possible to get the
true condition of the banks of this country now, and not next year after two or
three other banks perhaps have failed.
Mr. Hanson: We are not inquiring into the condition of the banks of
Canada.
The Vick-cHAIRMAN: The witness has given a statement of the system of
Government inspection of the banks. We have, I think, accepted a ruling that
we were to cross-examine on this point. If the honourable members would like
to introduce a subject of which mention is now made I think it should be made a
[Mr. George Edwards.]
BANKING AND COMMERCE 23
APPENDIX No. 1 4
special matter for discussion later on, but I think it would be advisable if the
Committee want the evidence to be intelligible to restrict questions to the matter
of Governmental supervision of banks.
Mr. Garuanp: This has a very direct bearing on Government inspection.
We want to ascertain what information the Department of Finance and the
Minister has with regard to the condition of banks; what protection there is for
the people of this country in regard to that, and I asked the witness if he knew
the condition of the banks, and if not, from whom can the Minister of Finance
at this moment within his Department secure this information.
Mr. Hawson: I think it is out of order.
_ The Vicr-Cuatmrman: I think the question as put now in its general form
is quite relevant.
By Mr. Garland:
Q. If you are not aware of the condition of the banks to-day, from whom,
in the Department of Finance, can this Committee secure such information as
required?—A. I think the maximum of information on the subject is in the
hands of either the Deputy Minister of Finance or myself.
Q. What opportunities have you for getting this information?—A. The
Minister, in the exercise of the powers given to him by the amendments of last
session, called for a great deal of additional information from the banks and
that is being furnished, and I have examined that information.
. You think the Minister and his Department will be in a better position
from now on to know the actual condition of the banks?—A. I consider the
Department is in infinitely better position than it was a year ago to know
the condition of the banks.
Q. Will it have sufficient knowledge now to guard against any such recur-
rence as the disaster to the Home Bank or the Banque Nationale, as has been
suggested?—-A. I am inclined to think so, but I would not like to answer the
question too positively.
Q. You would not like to answer that statement?—A. I do not want to give
an unqualified answer now to this question.
By Mr. Hanson:
Q. Dealing with the question of Government inspection of banks which
is an important proposition, and having regard to your knowledge of the Cana-
dian banking system, will you agree that this proposition that the solvency of a
bank depends entirely upon the value of its securities, and the method by which
a bank is using its depositors’ money?—A. Yes, the value and convertibility.
Q. And of course the liquid stability and convertibility of its securities ?—
A. Yes.
Q. Do you think any Government inspection would put the Department in
the position to analyze correctly the value of the banks’ securities, especially
with the branch system?—A. I think if the machinery now in the Act is set in
motion that can be done.
Q. Will you elaborate on that a little more? In what way do you think
the average Government bank inspector, such as they have in the United States,
would be able to valuate the collateral lodged with the bank, say in Cuba, or
any province in Canada? Would he be in a better position then than the banks’
own inspection system?—A. The functions of an auditor are distinctly judicial.
He is entitled to call upon anybody and everybody whom he thinks may be able
to help him, and to enlighten him, whether on the question of values or other
facts, and he has the right, and I would say it is his duty, as an auditor under
the present Act to examine into and form an independent judgment upon every-
[Mr. George Edwards.]
24 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
thing put before him. And I say, that strengthened and supported by the in-
formation that he can obtain, examining the officials of the bank, and the re-
ports of inspectors and all the material there available, he is in a position to pass
a very intelligent judgment on the situation.
By Mr. McMaster:
Q. And that judgment can be untrammelled and independent? Is not that
the value of the Government inspection?—A. That is the theory, yes.
By Mr. Hanson:
Q. You are familiar with the bank inspection of the United States?—A.
Not too familiar with it. I know something of it.
Q. Is it not a fact that their system of Government inspection has not
prevented the failure of banks? Is it not a fact that the Government inspection
of the United States usually brings about the failure of banks in the case
of the weak ones?—A. The Government inspection of national banks is supposed
to occur twice a year in the case of each national bank. It is impossible to say
whether any of these half-yearly inspections by the Government inspector has
had a deterrent or a salutary effect upon the future condition of the bank.
I think these facts are not available to the public.
By Mr. Morin:
Q. Has it prevented failure?—A. I would say that likely it has prevented
some failures by giving notice or warning to a bank to restrict its activities
or put its affairs in a more satisfactory condition. I have no doubt it has had
some good effect.
By Mr. Marler:
Q. You are familiar with the present system of bank inspection and the
reports which the auditors send in, and to whom they are sent in? With all
of that you are quite familiar?—A. Yes.
Q. You are also familiar with form of returns these auditors are required
to send in?—A. Yes.
Q. You are also no doubt familiar with the various procedures of the
auditors before the reports are signed by the auditors themselves, and the officers
on behalf of the bank?—A. Yes.
Q. You also are in no doubt as to what these auditors do in the preparation
of the statements? In other words, as to the books and securities they examine
and the general effect of the statement as submitted for final approval?—A.
Yes.
Q. In your examination by Mr. Woodsworth this morning, did I understand
you to say that any system of Government inspection would consist of a primary
inspection or a secondary inspection? I mean by that, would a Government
inspector make another inspection of securities, or the value of securities and the
various books of account, or would the Government inspector take as satisfactory
a primary inspection made by the auditors under the Bank Act at the present
time?-—A. If upon making a general test of the situation he was satisfied that
the auditors appointed by the bank had fully done their duty in this matter, he
would place great reliance upon that.
(. Mr. Edwards, this is a very important point because this system of
Government inspection has either to be a good inspection or a bad inspection,
an inspection of value to the shareholders or depositors, and to the public gen-
erally, or is not to be, and in that broad and essential feature we are all very
anxious to learn all we can, in view of what has passed in the last year or so.
Will you tell the Committee this; assuming there is a Government inspection, how:
{Mr. George Edwards.]
BANKING AND COMMERCE 25
“APPENDIX No. 1
can the Government inspector judge from the returns made by the ordinary
auditor of the bank anything more than a very superficial condition of affairs?
Before you answer that, would you also consider this point? Is the account as
submitted and approved by the auditors of the Banque Nationale more or less
than a general account and statement, without actually getting into the value of
matters in that particular account? I am asking for information now.—A. By
no means. The auditor, under the Act, has to form an independent opinion, and
that is to state that the statement referred to discloses the true condition of the
bank. That is section 56, subsection 11, and I would say that unless an auditor
reasonably satisfies himself upon the value of securities, he cannot give that
certificate.
Q. In the past, if an auditor satisfied himself with regard to the value of
securities, loans, mortgages and hypothecs taken by the bank in the way of
collateral and submitted that as an actual statement showing the value of the
assets, was that sufficient?—-A. My opinion is that any first-rate firm of auditors
would do that, whether required by the Act or not, and I think in most cases it
was done under the old Act.
Q. That has been your experience?—A. It has not been my experience in
the Merchants Bank case nor the Home Bank case, but I think in the majority
of cases it was so.
Q. Was it your experience in the Home Bank case?—A. The Home Bank
case 1s, of course—
Q. I am asking for information now?—A. I do not know how much I ought
to say with regard to the methods employed by a man who is under indictment
at the present time, but he did not give attention to value.
Q. Was it your experience in the Banque Nationale case?—A. I was not in
that. I cannot answer that.
Q. Was it? That is a very serious matter, because the statement showed
little or nothing and was of no value at all_—A. I do not like to venture an
opinion upon something I have not seen.
The Vice-CuHairMan: I do not know if that question is in order if the
witness says he would not venture an opinion, because he had nothing to do with
it.
By Mr. Marler:
Q. I am not trying to throw suspicion on any statements you have made
but simply to get at the actual procedure which will be effective in the event
of the Government inspection of banks, because it goes without saying that
unless we have a true and proper inspection there is no use having any at ali,
so I am citing these particular cases regarding these banks because if a second-
ary inspection is to be made, that is to say an inspection of an inspection, will
we be in any better position than we are now? These past inspections have
apparently not been of any particular value, and what I want to ask you again
is, if these are merely secondary inspections, are we going to get any better
system of inspection, or are we not?—A. There are fourteen banks, and it is
quite possible that there are fourteen points of view with reference to the rules
to be applied to values. I think there will not be that many but the advantage
I would suggest from an officer coming into contact with all the banks would be
that he would be able to standardize the point of view, and that would be a
very helpful step to take. In other words, the rules that a very strong bank
would apply might not be the rules that a less strong bank would apply, and
one man viewing the whole situation would be able to measure the standard
of values applied by one bank with the standard of values applied by another
bank and arrive at a certain judgment as to the proper pgint of view to apply to
all the banks.
(Mr. George Edwards.]
26 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924*
Q. Is that not very generally applied to institutions of that description? 1
mean to say that the government inspector eventually standardizes what the
values are, say by the procedure adopted by a well-known institution like the
Bank of Montreal. Is it the intention of the inspector in a bank inspection
case to get actually down to the facts and see whether or not the securities in-
cluded in the statement are good securities or bad securities?—A. I would say
that that ought to be included.
Q. In the other words that would be a direct inspection by the government
inspector of those particular securities, not taking the inspection by the auditors
under the Bank Act, but a direct inspection by the government inspector of
those particular securities, so that that inspector can see that that particular
item in that account, as returned to the Minister of Finance was actually correct?
—A. Do you mean by securities, the loans and securities, current and commercial
loans, everything?
Q. I do.—A. It would be practically impossible without a huge organization
for an auditor to make first hand examination of that kind.
Q. That is the very point I want to get. Those securities could not possibly
be inspected by a government inspector, commercial loans, current loans, various
non-current loans, mortgages taken as securities, hypothecs, loans for collateral,
and half a hundred other transactions—it would be utterly impossible for the
Government, without a huge staff, to verify those in any particular?—A. In
the first instance yes.
Q. That is a direct answer no; they could not do it?—A. No.
Q. A Government inspection will come down to a secondary inspection. It
could not be anything more or anything less?—A. A Government inspection
would take account of the procedure. I think that is very important, the pro-
cedure which a bank adopts for the safety of its creditors and its shareholders;
in other words, the internal system, the value of it, the efficiency of it and the
personnel of it—all these matters are matters which would contribute to the
auditors’ information and to the judgement which he would form upon the
situation. J think it is the only way it could be done.
Q. What is the value of the audit to the Minister of Finance if the Govern-
ment inspector simply looks into the ordinary general procedure of a bank aud
sees that the bank is correctly run or not correctly run. That is simply super-
ficial. What good would it do to see that the outstanding current loans, say
of $20,000,000, were worth $20,000,000, or not?—A. I can assure you that is of
very great value. If an outside inspection of the two cases of the Merchants
Bank and the Home Bank had been limited to a study of the procedure of those
banks, it would have led to earlier attention.
Q. If I am not taking up too much time, take the study of procedure; you
mean by procedure as to how, and to whom, a loan is made and on what collateral
the loan is made? Am I correct in that?—A. And what examination and what
precautions are taken with regard to the granting of it.
Q. That means that substantially in every single large loan, every one, the
procedure would have to be examined directly by the Government inspector?—A.
I think the Government auditor could satisfy himself as to the procedure without
necessarily going through every detail of it.
Q. Could he do so without valuing the securities?—A. For that purpose he
has the assistance of the Banks’ Internal Inspection, the reports of the branch
managers as to outside securities, and he has periodical statements, all of which
tend to corroborate or disprove one another, and the collective value of that
information is enormous.
Q. Also, I may add, the information given him by the ordinary auditors of
the bank?—A. Quite.
[Mr. George Edwards.]
BANKING AND COMMERCE Dy
APPENDIX No. 1
Q. In other words, this information is first of all collected by the ordinary
auditors and sent to the head office. These returns are made by the ordinary
bank auditors under the Bank Act, and when the Government auditor comes
along and looks over the whole thing again. How much further do we get by
the Government inspector doing that? Mark you, he is taking the values given
to the securities by the banks’ own inspectors and by the banks’ own auditors,
and he is also taking the personnel. You will agree with me—
Mr. Heaty: I do not think we should argue those points with the witness.
Mr. Marter: I am not arguing; I am trying to get at a very important ques-
tion as to whether a Government inspector would do any good. If it is a good
system, let us have one that we know about.
Mr. Heaty: I think that right now you are arguing; we want to get the
evidence.
The Vicn-CHAIRMAN: In cross-examination an hon. member who puts a
question can argue with the witness to obtain further information or his point
of view on any particular subject. Of course, we must not indulge too much in
it, but I think it is fair, and I think the hon. member, so far, is quite in order.
Mr. Marter: I am not trying to make a speech.
Mr. Hearty: You were certainly succeeding.
Mr. Maruer: You will forgive me, Mr. Edwards,—
Wirness: I am very much interested in your questions.
By Mr. Marler:
Q. The point I am trying to make clear to myself and to the Committee is
as to the value of Government inspection. I think you will agree with me, and
I think perhaps the Committee will agree with me, and I think the Acting Min-
ister of Finance will agree with me—
Hon. Mr. Ross: not always.
Mr. Maruer: If the Government does take up Government inspection, the
Government .must assume certain liabilities in that connection. How can you
get out of assuming certain liabilities? What is the intention of Government
imspection unless the public knows that the Government O.K.'s, puts its guinea
stamp on the statement that comes out—there is no getting away from that.
Witness: I suppose that the value of Government inspection is the know-
ledge that so long as the Government takes no action in respect to a bank,
it is satisfied with its position.
By Mr. Marler:
Q. We have that position of affairs at the present time. Taking no action
with regard to other banks in the past, the public has gone ahead and thought
that those banks were perfectly solvent.—A. Of course, there is the new Act.
Q. There is the new Act, and since that Act was promulgated, many things
have happened during the last six months; we are quite aware of that?—
A. I think that is complimentary to the new Act.
Q. Perhaps it is; perhaps the new Act will cure a great deal. But to return
to the question of bank inspection, am I right in thinking that this bank inspec-
tion which is suggested will be a secondary inspection? You quite understand
from my argument what I mean by secondary inspection?—A. It will be a
secondary inspection for the most part.
Hon. Mr. Ross: Before we leave that point, I notice that Mr. Marler and
other hon. gentlemen have, by way of reference, alluded frequently to the
[Mr. George Edwards.]
1—15
28 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
amalgamation of the Banque Nationale, and to the failure of the Merchants
Bank and the Home Bank. I would like Mr. Edwards to clear up the difference
existing between the present Act as amended last session and the old Act, and
to say if in his judgment the amended Act hurried along an improvement of
the situation, the protection of the depositors’in the Banque Nationale, and
perhaps brought about the crisis in the Home Bank.
Mr. W. F. MacLean: They have protection, but it seems that it is
dependent upon somebody’s action. Is there something imperative when this
improved system, of which the Acting Minister speaks, goes into operation.
Does the Minister say that there. is something imperative on somebody under
the Act now to have a real inspection of the banks?
Hon. Mr. Ross: The Minister has very decided opinions as to what the
Government proposes to do, but I want the witness, who is an expert, to clear
up for us, and for hon. gentlemen as well as for myself, what real powers we
have under this new Act, what is the difference between this Act and the old
Act.
Mr. W. F. Mactean: Is it dependent on an “if ”?
Witness: So far as I was able to do so, I advised the Minister last session
as to the amendments which might be made in the Act to correct the defects
in the previous one. One of those defects, as developed by the Merchants Bank
case was this: There was legal opinion existing to the effect that a bank was
not required to set aside appropriations for losses occurring during the year
until the time came for issuing its annual statement. I think I am correct in
saying that the opinion was expressed during the course of the trial in Montreal
of the Merchants Bank directors that a statement which conformed with the
books was the only statement that could be made to the Government. Now,
under the revised Act, that is all altered. Every monthly statement must dis-
close the true condition according to the latest information available; that is to
say, any knowledge of losses occurring during the previous thirty days must
be embodied in the statement, and appropriations must be set aside and kept
set aside month by month for those contingencies.
By Mr. Hughes:
Q. What Section is that?—A. Section 113, subsection 4.
“Notwithstanding anything in the last preceding section contained
it shall not except as to the chief accountant or acting chief accountant
of the bank, be sufficient for the purposes of any return provided for or
required under the said section that such return agrees with the books
of the bank, but the return shall set forth the true financial position of
bank on the last judicial day of the month last preceding the date of the
return according to the latest information possessed by or reasonably
available to the officers of any of them who sign the return.”
I think that is an exceedingly important amendment. That would include
a situation such as was developed in the Merchants Bank case.
By Mr. Spencer:
Q. What penalty is there?—A. The penalties are in Section 153. There
is punishment by imprisonment for five years where it is done with intent, and
where there is neglect, imprisonment not exceeding three years.
By Mr. Sales:
Q. It is a criminal offence?—A. It is a criminal offence. Then in connec-
tion with the audits. I think I made it clear to the Committee when I ad-
{Mr. George Edwards.]}
BANKING AND COMMERCE 29
APPENDIX No. 14
dressed them last year that the audit clauses were ineffective; that is to sav
the audit clauses only permitted the auditors to go so far. In other words,
their scrutiny of the banks’ affairs was limited if the management chose to limit
that inspection to certain specific things mentioned in the Act.
By Mr. W. F. Maclean:
Q. In which clause of the Act?—A. That was in Section 56, the old 56. I
have not got it here. Now, that is all changed, and an auditor expresses his
opinions on the position of the bank without any reservation.
Q. Is that set out in sub-section 8 of sub-section 9, page 26 of the new Act?
—A. Sub-section 8 was in the old Act.
Q. Sub-sections 8 and 9?—A. Sub-section 8 states “Every auditor of a
bank shall have a right of access.”
Q. What I want to know is where is this improvement that the Minister
wishes you to explain in the new Act?—-A. You are referring to sub-section 8.
That is the same in the new Act as it was in the old. but by reason of the con-
text of other sub-sections of the Act it has a different effect.
Q. A better effect?—A. A better effect.
Q. But it is all dependent?—A. It reads:—
“Every auditor of a bank shall have a right of access to the books
and accounts, cash, securities, documents and vouchers of the bank, and
shall be entitled to require and receive from the directors and officers of
the bank such information and explanation as may be necessary for the
performance of the duties of the auditors.”
The other sections of the old Act limited the duties of the auditors. In effect
they were denied access to certain books.
Q. That is for the protection of the auditor. He must act. But for the
protection of the public we have clause 9, where it says:—
“The Minister may from time to time require that the auditors of a
bank shall report to him upon the adequacy of the procedure adopted
by the bank or the safety of its creditors and shareholders.”
and so on. It is not imperative as to his doing it. Should there not be an
officer whose duty would be imperative to do something for the protection of the
public? There is one other observation I want to make. My honourable friend
from Montreal (Mr. Marler), has said something about public inspection not
being sound. We are going to get some man who knows what bank inspection in
the United States really means, and I want witnesses to come here and tell us
what Government inspection really means.
Mr. McMaster: I postponed asking a question in order to give the witness
ample opportunity to answer the Minister’s question, and I think he should be
given that opportunity.
The Vicz-Cuamrman: I suggest that we listen to the witness, and then any
member who wishes to put a question can do so.
Mr. Irvine: I wish to suggest that the Hon Acting Minister of Finance
introduced chaos. If he wants to get information, why does he not ask the
questions himsself, and bring out the information.
Mr. McMaster: He asked the witness to address himself to certain ques-
tions, and the witness has been interrupted and has not had a chance to reply.
Wirness: What I say about sub-section 8 is that while it is the same sub-
section, the duties of the auditors are differently defined. It enlarges the right
of access on the part of the auditor, although it is in the same words as were in
before. As to sub-section 9, I have already testified here as to what I think
should supplement that section. I think sub-section 10 is a very important one.
{Mr. George Edwards.]
1—15$
30 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The thing that impressed itself upon me in the course of my examination of the
Merchants Bank affairs was the ignorance of the directors as to very important
facts affecting the position of the Bank. Arising out of that, several clauses or
sections of the Bank Act were amended in order to emphasize the responsibility
of the directors; and one of the things that was done to assist the directors by
ensuring that they would have a knowledge of matters, and that matters could
not be concealed from them was sub-section 10, which places upon the auditors
the duty of bringing such matters to the attention of directors in a written docu-
ment mailed to each director; and each director has that responsiblity. So, a
director has two chances independently, through two auditors, to obtain informa-
tion which may have been previously concealed from him. In most cases, I think
directors will take their duties seriously if they have the facts, and this was
intended to ensure that the directors would have the facts; and I think to that
extent it is a very great improvement over the Act of last session.
Now, another improvement is in the fact that there are two independent
auditors. That is to say, they are not connected in business; they have no com-
mon business relationship. Each is responsible for his own acts. That arose out
of consideration of the Merchants Bank case, where two partners in a firm were
appointed auditors and the matter was left for the most part to one of the auditors,
the other accepting responsibility for what he did. That cannot occur again. A
further provision provides for a rotation of auditors—not exactly that—at all
events, that there shall be a change of one of the auditors every two years, so
that every two years, whatever may have been the defect in the point of view
of the previous auditors, there will be a new auditor coming in without any
previous knowledge and viewing the matter for the first time and expressing his
opinion. That is an excellent feature. I believe that the audit clauses are
tremendously in advance of the old ones, and afford a great measure of security
to depositors, or assurances, at all events of the position of the bank. Now, in the
Home Bank case, they never came under the operation of the new Act; they
never made a return under the provisions of the new Act.
By Mr. Hanson:
Q. They could not?—A. The collapse came before the new Act came into
effect. They could not have complied with the requirements of the new Act.
Q. The same is true with regard to the Banque Nationale?—A. As I said, I
do not know about that case.
By Mr. McMaster:
Q. Mr. Edwards, am I right in my view that the failures of banks in recent
years have been principally failures due to what you might call head office
management rather than branch management?—A. They have been due to
causes which were ascertainable by examination of the head office accounts and
procedure.
Q. Were they not due, in some measure at least, to the advancement of very
large sums of money in comparison with the total reserves of the bank, to
tr alata few customers in number?—A., Well, there were instances of that
ind.
Q. Would that not be easily discoverable by a Government audit?—
A. Easily, yes.
Q. Would the Government audit be able to determine, without a great deal
of digging a comparison of the nature of the securities accepted by the different
banks?—A. I think so, and it would be very valuable. You would have a
comparative study of each bank.
Q. If it appeared that one bank was lending very large sums of money—let
us say on such a commodity as cheese—while other banks were restricting their
(Mr. George Edwards.]
BANKING AND COMMERCE 31
APPENDIX No. 1
advances on such a commodity, would not that be easily discoverable by a
government auditor, and would it not enable him to bring that matter to the
attention of the Government?—A. The matter would provoke inquiry, would
lead to inquiry.
Q. Would not a government audit easily discover whether banks were
advancing different amounts in respect to securities more or less of the same
value? Let me give an instance. Let us suppose that a number of banks were
advancing considerable sums of money on lumber, say, on timber limits; would
it not be very easily discoverable if one bank was lending a very much higher
amount per mile than other banks were lending on limits on comparatively the
same value?—A. It would, and it would also lead to inquiry. I would think where
any bank was lending unduly on any class of security which might be adversely
affected by market conditions causing a serious slump. ;
Q. Would it not be easily discoverable by a government audit if certain
banks were lending say one customer or two customers a very much larger
proportion of their total reserves, both in capital and deposits, than the ordinary
rules of banking permitted?—A. Yes.
Q. Then, it is your opinion, as I take it, that although a government audit
might make use of a great deal of work done by the banks’ internal audit, never-
theless, it might have a very wholesome effect in preventing such a situation?—
A. Yes.
Mr. W. F. Macuran: Do you mean by government audit, government
inspection?
Mr. McMaster: Yes, government inspection.
Witness: While on that point, I would like to make this statement respect-
ing the value of information obtainable from the bank’s own offices. Mr. Marler
rather inferred, I think, that it would lack dependability if obtained from the
bank’s own officers. It might be a fact that certain bank officers were not
dependable.
Mr. Maruer: As to secondary evidence, not primary. They might be quite
dependable as regards primary inspection.
Wirness: My point was simply this: If you have reports coming in from
500 branch managers, they are the views of 500 people each upon the matters
under his own eye. That is an almost invaluable source of information, taken
collectively. There may be a few optimists, and there may be a few pessimists,
or a few who are deliberately concealing. But in the mass that will be very
dependable information upon which the Government auditor could rely, if he
finds that the system is being properly carried out and that the procedure is
right.
By Mr. Irvine:
Q. Mr. Edwards, I think you said a few moments ago that you advised the
Minister last year as to the amendments which were incorporated in the Bank
Act?—A. Yes.
Q. Did you advise him with regard to those which were dropped, as he
himself proposed?—A. I do not recall to what you refer, Mr. Irvine. I know
that the Minister altered the form of certain amendments. He stated at the
outset that he might have to do that in the light of the evidence given,
Q. Mr. Fielding moved that clauses ‘‘M” and “N” be struck out. Those
were his own sub-sections?—A. What section?
Q. Section 54. They were dropped, and he argued they were dropped on
the advice of the bankers’ representatives that it would perhaps be information
that should not be given?—A. I remember that.
Q. I was wondering who advised him?—A. It was agreed by the committee
that the Minister would be at liberty to obtain information in any way, and
{Mr. George Edwa'ds.]}
32 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
special sub-sections were passed to enable the Minister to do that, and that was
being done all through the recess.
Q. Did you think last year that any form of Government inspection would
be of any service to the depositors?—A. I don’t remember just what view I took
last year.
Q. You did not advise the Minister against the passing of Mr. Woods-
worth’s resolution, did you?—A. I took the responsibility of commenting upon
it to the Minister.
Q. Unfavourably?—A. I said nothing to the Minister but what I said in
Committee. j
Mr. Suaw: Surely the witness has the right to change his mind?
Mr. Irvine: Certainly.
By Mr. Irvine:
Q. I suppose you will object to something I will suggest in a few minutes;
it would not follow that it was wrong for me to suggest it. You might agree to
it next year after four or five more banks have failed, but where others have
done their duty to the best of their ability, according to the Bank Act, when
the Finance Minister has used discretion and done his duty according to that
discretion is it not still impossible to prevent a bank from failing?—A. No.
Q. So that a bank may fail when the very best has been done with the Act
as it now stands?—A. Yes.
Q. Or so far as it may be amended?—A. Quite. A bank may fail from
causes that have nothing to do with a Minister’s discretion.
Q. You cannot see any way by which a Minister may be allowed to accept
responsibility for public losses, but can give advice in certain cases?—A. Not
unless he is prepared to manage the bank. If the Minister were to do that it
would lead, I doubt not, to laxity of management.
Q. You suggested a few minutes ago to Mr. Woodsworth that he could not
accept that responsibility ?—A. I don’t think I put it exactly that way. I would
say he ought to accept no responsibility involving a guarantee of deposits.
Q. And IJ think you suggested also that it would not be advisable to permit
the public to know the facts as to how the banks are investing their money ?—A.
I think that would be very dangerous.
Q. Then you agree that the bankers have all the protection that can be
logically given to them while they enjoy the right of franchise or of charter to
handle the public funds, but the public has absolutely no protection. Is that the
situation?—A. I don’t quite follow you. I don’t think I have said anything to
lead up to that conclusion at all.
Q. Will you disagree with that?—-A. My activities in connection with the
Bank Act, at the request of the Minister, have been entirely in the public interest.
Q. Yes, but you have agreed that when you have done your best, you
cannot protect the public from bank failures?—A. I agree there are some con-
tingencies which cannot be met by legislation.
Q. Then the situation is that the Minister cannot accept responsibility, or at
least, you would not advise him to, but you would advise that the public must
not know as to the condition of their deposits and how bankers are handling
them. We have legislation which protects the bankers in that respect but there
is no legislation to protect the public? —A. I think the whole Bank Act is legisla-
tion to protect the public.
Q. Then the whole Act fails when the crisis comes?—A. In my judgmeus
gives a very large measure of protection.
Q. Do you believe in the general principle that public savings should be
protected?—A. I think so.
[Mr. George Edwards.]
eS).
BANKING AND COMMERCE 33
APPENDIX No. 1
Q. Well then since the public is not allowed to know the facts, and since
the Minister cannot be responsible for losses sustained by a private corporation
to whom the country’s credit has been given, and since many people are called
upon to sustain periodical losses because of this condition, and since the Govern-
ment inspection can give no guarantee of safe-guarding deposits, you would not
advise that the people take back from the banks the chartered right of con-
trolling their credit?—A. That is rather an involved question.
Q. I am asking it from your own statements, Mr. Edwards. I have followed
your steps of what you said could not be done, and what it is nos advisable to do,
and the facts of the present situation. You cannot state there will be no bank
failure next week; you did not answer Mr. Garland’s question as to the condition
of banks at the present time. They may break to-morrow. I think you have a
knowledge of banking and you think there is something wrong, since you cannot
tell us about it?—A. No, you are absolutely wrong.
Q. That is the impression I got. Possibly others may have got a different
impression.
The Vice-CuHatrMan: I hardly think that question has been fairly put.
Mr. Irvine: I am not pressing the question.
The Vice-CHAIRMAN: You are cross-examining the witness. Put questions
to him.
Mr. Irvine: I was connecting my previous question to that situation. I
am not pressing for an answer to that question at all.
By Mr. Irvine:
Q. I have been trying to follow your line of reasoning as you have been
examined by other gentlemen, Mr. Edwards, and you have given in a clear
manner the statement that the public must not be allowed to know exactly what
the banks were doing. That is one thing you have said. You have also said it
would be inadvisable for the Minister to accept any responsibility with regard
to guaranteeing deposits, and you have admitted that, so far as you are aware,
there is no system of banking inspection that would absolutely guarantee against
losses?—A. Quite.
Q. You do not have to admit it; it is a general fact that the public sustain
losses because of these conditions which now prevail, and in view of the fact
that they cannot be altered in the way we are asking, as you say, are you in
favour of giving back to the people in some way or other control of the credit
which the bankers are now permitted by legislation to monopolize?—A. I would
have to understand a little more about it before I could answer that.
Q. Supposing I suggested we should have Government ownership of banks,
since the bankers cannot guarantee deposits—I do not say that is the best way,
but that is one way; would you be in favour of that?—A. I think it would be
a very difficult experiment, Government ownership of banks. I know it has been
done in Australia, but I could not possibly, in a moment, give an opinion on that.
Q. Would you say the present system as it is now operating is a very difficult
experiment?—A. It is a well-tried system.
Q. Yes, well-tried, but the Home Bank and the Merchants Bank and the
Farmers Bank were all outstanding failures. Are you satisfied with that?—A.
Those are, of course, regrettable incidents, but they do not disturb my confidence
in the general system of banking in this country.
Q. They disturb the confidence of a great many other people who perhaps
are more important to banks either than yourself,—the depositors.——A. It has
no doubt disturbed public confidence.
Q. Have you anything to suggest at the moment which would re-establish
public confidence since it is known now there is no safety for depositors? Do
{Mr. George Edwards.]
34 . SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
you believe you could re-establish a confidence on that basis?—A. I think it
would help.
By Mr. McMaster:
Q. The amendment you have suggested would help?—A. Yes. Oh, do you
mean the amendment of last session?
By Mr. Irvine:
Q. Yes. From your own knowledge you admit there is no guarantee of
safer deposits?—A. I will put it this way; I think the Audit and other sections
introduced into the Act last year were great advances over previous conditions.
I think a super-imposed system of supervision of banks through a Government-
appointed officer would be a further advance over the Act in its present form.
I do not say it would be a “cure-all” or that it would favour absolute guarantee.
Q. But my question is, do you think you can build up a confidence without
that guarantee?—A. I don’t know why not. There is no such thing as a guarantee
of bank deposits, anyhow.
Q. That might be, but you will quite agree that in Canada at the present
time there is a widespread distrust of the banking system?—A. I don’t know that.
I think some people are persuading themselves that way, but I do not think that
is the fact.
Q. I would like to persuade you it is a fact and that there are great grounds
for that fact. We ought to have something to re-establish that confidence in the
interest of Canada, and I suggest that on the present basis that cannot be done.
Do you agree with me?—A. No, I don’t agree with you.
By Hon. Mr. Stevens:
Q. I would like to ask you one question. ‘The suggestion is made that
perhaps we could strengthen the present audit system by super-imposing an
inspection of head offices. Having in mind subsection 9 of section 56, for
illustration, I would like to ask you, if it were made obligatory instead of
simply optional with the Minister that the banks’ auditors instead of reporting
from time to time should report at specified periods, say from three to six
months, would not the Minister or an official appointed by the Minister be in
possession of all the essential facts necessary to correctly understand the condi-
tion of the banks, equally as well as if the Minister appointed somebody to
enter into an examination of the books for himself?—-A. In my opinion, yes.
Q. So that an official of the Finance Department, qualified of course,
would accomplish all we are now discussing in regard to an additional audit,
just as well as by a physical examination of these head office accounts?—A.
I think so; but at the same time it does not preclude the right of the Govern-
ment officer to investigate personally anything he saw fit.
Hon. Mr. Stevens: Yes, we should have that clearly understood, that it
is not to prevent any further examination.
By Mr. Hughes:
Q. Has the Bankers’ Association any knowledge of the methods pursued
by the bank, whether they are in accordance with the usual banking principles,
and prudent or imprudent?—A. I have not sufficient knowledge to answer
that question generally, but I remember having a conversation with the general
manager of a bank, and I discussed with him the degree of knowledge which
the other banks might have been expected to have of the condition of the
Home Bank during the few years preceding its collapse, and the answer was
that in that case it was difficult to know what to make of it. There was a
variety of opinions held with regard to the position of the Home Bank; some-
[Mr. George Edwards.]
BANKING AND COMMERCE 35
APPENDIX No. 1
times they thought it was not as good as it ought to be, and at other times
their suppositions were altered. I can only ask you to draw your own inferences
from that conversation, because that is as far as it went.
Q. There were suppositions, at all events?—A. Doubts were occasionally
raised. I say that in order to suggest to you that the banks probably have no
special facilities for ascertaining the condition of other banks.
Q. Has the Bankers’ Association access to the returns whick are made to
the Government?—A. The monthly returns, yes. They are published iv the
Gazette.
Q. But they only have access to the documents to which the public have
access’—A. Well, as far as I know.
Q. And from an examination of these returns could an opinion be formed
as to the method pursued by the different banks and as to their soundness?——
A. From all the information which is given to the Government in the form
of returns a tolerably good opinion could be formed—although not complete.
Q. If the Bankers’ Association or an officer designated by the Association
had the power or the right to get all the information that comes to the Finance
Minister, in your opinion would that be a proper procedure?—A. A practicable
method?
Q. Yes, a practicable method?—A. It would be practicable, if the Bankers’
Association were willing or required to adopt that procedure; it would be quite
proper, I think, if they consented amongst themselves.
Q. That would give the Bankers’ Association as much knowledge as the
Minister of Finance or the Deputy Minister possessed?—A. If the powers to
obtain information were as wide as those which the Minister now has.
Q. Would you have any objection to a personal inspection, or would you
see any objection to it from a public standpoint?—A. None whatever; if the
Bankers’ Association can do it, I would have no objection whatever.
By Mr. Ladner:
Q. On this very question yesterday I understood your opinion, after some
examination, to be that it would be in the interest of the country and the banks
to have legislation for the establishment of a system of separate Government
inspection of the larger accounts at the Head Offices. Now, I am not speaking
of the time when this should be done. Are you still of the same opinion and
would you so advise the Minister of Finance?—A. I think I said yesterday,
Mr. Ladner, that it would have advantages, but I want to make it clear that
that alone would not constitute an adequate degree of supervision by the Gov-
ernment, if the Government were to decide upon supervision.
Q. As compared with the existing system, would it not be advantageous
to establish a system of Government inspection of the larger accounts at the
head office, because it is these accounts which have brought ruin to the bank?
Apart from the question of perfection, would it not be wise to do that, as I
understood you to say yesterday, at the next session of Parliament?—A. I
think you could go further than that under the powers which the Minister now
has.
Q. If he exercises his powers now suddenly, would it not be injurious to any
bank he might enter, unless you made it an obligatory and regular inspection?—
A. Quite. Any exercise of these powers, in my judgment, would have to be
applicable to all the banks so that there would be nothing conspicuous about.
the entire thing.
Q. So the effectiveness of this provision for inspection by the Minister is
approximately nil in its practical working out?—A. Not necessarily.
Q. It would apparently have to be an extreme case in which the Minister
would be disposed to exercise that power under the Section, and send an examiner
{Mr. George Edwards.]
36 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
or auditor into the bank?—A. I do not think the sub-section contemplated merely
a special set of circumstances, Mr. Ladner. I had something to do with the
wording of that, and I know that was not in my mind.
Q It is not what was in your mind; it is what has been expressed—A. I
think it expresses that too. I do not think it necessarily conveys the impression
that it was to be used only in special cases.
Q. You think the Minister could not act under that Section unless he
examined all the banks?—A. No, but I think it would be imprudent to exercise
it in the case of one particular bank.
Q. Then the Section does not amount to very much?—A. Yes, because he
can exercise his discretion in regard to all the banks.
Q. Your judgment is this, that if something was wrong with one bank it
would be imprudent for the Minister to exercise his powers under this Section,
unless he examined all the banks from the largest to the smallest. That is not
very practical—aA. I think it is a very practical section.
Q. Do you not think that an irregular and impulsive inspection which would
be imprudent and injurious, perhaps, would not be as good as having a system
of Government inspection of the larger accounts at the head offices with a direct
responsibility from the bank to the Government—not to the bank auditors, but
to the Government examiner?—A. No, I would not disregard the bank auditors,
or the responsibility of the bank officials.
Q. I am not asking you to disregard the bank auditors, I am asking i it
would not be in the interest of the country and the banks to have a system oi
Government inspection by Government men of the large accounts at the head
office. That is a plain proposition. Do you agree with it or not?—A. If nothing
better was possible I would say that would help, but I think we have something
better already in the Act.
Q. With this Section?—A. Yes.
Q. It makes the Minister examine all the banks when he only wants to
examine one?—A. Why should he want to examine one. He has a very good
chance to examine them all.
Q. Because he has evidence that one is not acting in good faith, or is acting
wrongly, do you think he should examine all the banks?—A. I do not think
that was the purpose of the sub-section. I think the purpose was that there
should be a general inquiry into all the banks along the lines suggested.
Q. Surely that is a futile thing to do?—A. Absolutely not; it is a very useful
thing to do.
Q. Suppose he found out something was wrong with one bank; what is the
course that the Minister should pursue?—A. If you say it is futile, you have to
take it for granted that some banks are sound and some are not, and that is
not a fair assumption for you to take.
Mr. Lapner: I think it is fair to assume that some banks are more sound
than others—very much more.
Hon. Mr. Ross: Will you tell the Department what banks you think are
unsound?
Mr. Lapner: Does the Minister think all of the banks are of equal strength?
Hon. Mr. Ross: No, but I wish you would tell the Department which banks
you think are unsound.
Mr. Lapner: I will admit that some banks are more sound than others. in
the past we have been faced with a situation where the public thought they were
all sound, and some were absolutely rotten. What I am getting at is that with
this new plan, of which Mr. Edwards spoke, in the Act, outside of this Section,
[Mr. George Edwards.]
BANKING AND COMMERCE 37
APPENDIX No. 1
we would naturally conclude the Minister could investigate any single bank of
which he had knowledge that there was something wrong.
The Wrirness: Of course he has the power to do so under the Act, it would
be a question for the Minister of how discreetly he could proceed.
By Mr. Ladner:
Q. Apart from this Section?—A. No, under this Section, Mr. Ladner.
Q. Mr. Edwards, your conclusion is that he should examine all the banks?—
A. I think so.
Hon. Mr. Rozss: Do you object to that, Mr. Ladner?
_ Mr. Lapner: No, I don’t object to that, but I think it is not practical. I
think it would be better to have a periodical, regular inspection.
Hon. Mr. Ross: Of all banks?
Mr. Lapner: Yes, and not under discretionary power, because that would
not be fair.
By Mr. Maclean:
Q. I would like to ask you one question in connection with this duty you
are now imposing upon the bank auditors, as to whether there is any penalty
connected with the non-performance of the duties imposed?—A. I think so.
Section 153 includes the auditors. It says, “ Every president, vice-president,
director, auditor, general manager or other officer either for neglect or for
intent,” etc.
Q. What happens?—A. The section speaks for itself.
Q. But what is your opinion?—A. I think that brings the auditor within the
range of punishment if he does not do his duty.
Q. You said in substance that Government banks might be dangerous. I
want to ask you if you know, as a matter of fact, that the Government of the
United States and the whole credit of the United States is involved in a system
of re-discounting which makes the Government of the United States the greatest
banker in the world, and the backbone of the circulation of the United States
and the credit of all the banks? Do you admit that?—A. I can make no
definite statement as to the credit of the United States banking system.
Q. That is your statement. If your knowledge is limited you were hardly
competent to make that statement?
By Mr. Healy:
Q. I understood from your evidence yesterday that we had progressed this
far, that you were willing to advise the Government before next session in
regard to a Government system of inspection?—A. Yes, I stated yesterday, I
think, that to develop a system of Government inspection would require more
time than that afforded by the present session of Parliament, but could be done
by the next session.
Q. But we were permitted to conclude that you were ready to advise the
Government that it was necessary?—A. I do not think I gave an unqualified
opinion in regard to Government inspection. I think I limited it by stating
that it was to be a system of inspection superimposed upon the present means
of checking up banks, I would be in favour of it, but if it contemplated an inde-
pendent system of Government inspection, I was not in favour of it.
Q. I don’t care what the method is, as long as you are in favour of Govern-
ment inspection. May we conclude that much?—A. I am in favour of the
extension of the present system.
Q. Of Government inspection?—A. Yes.
(Mr. George Edwards.]
38 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. But it need not go any farther than the head office, or the centres of
reserve to make it practical?—A. And possibly a few branches if the circum-
stances warranted.
Q. Then if that secondary inspection led the Government to suspect a large
account in a branch, they would have the authority to go in there?—A. Yes.
Q. And that would make it practically a Government inspection of banks?
By Mr. McMaster:
Q. Increasing the security of the people’s deposits?—A. Yes.
By Mr. Healy:
Q. You are prepared to recommend that?—A. I do.
Mr. Hearty: Then why go further into the argument on inspection?
Q. You made another statement on which I want to be corrected if I have
-arrived at the wrong conclusion. You say there are no guaranteed deposits in
Canada?—A. There are no banks where the Government guarantees deposits.
Q. What about the Post Office Savings Bank?—A. I grant you that, but
that is not doing a banking business.
Q. That is what I asked you. It guarantees deposits?—A. Then allow me
to correct it, because I have no idea of considering a Government Post Office
Savings Bank as a banking institution. I am speaking of the banks as we
generally understand them; people carrying on the business of banking.
Q. But I am speaking of guaranteed deposits.—A. There are various sorts
of depositories which guarantee deposits; trust companies, for instance, have to
set aside a portion of their securities to cover the deposits.
Q. Quite right. Those are deposits guaranteed by the Government? That
is right?—A. That is right.
Q. Now, is there any other one? Does not the province of Ontario guar-
antee the deposits in its bank?—A. Yes.
By Mr. Shaw:
Q. Mr. Edwards, you have considerable faith in the amendment you pro-
posed last year, and one cannot blame you for having confidence in your own
child, but you said you were impressed in connection with the Merchants Bank
by the ignorance of the directors, and you consequently put in this provision
in which the auditors were called upon to report to the directors. You have
listened to the Home Bank case. Were you convinced there of the knowledge
of the directors?—A. I think the directors were ignorant, as a body.
Q. But were they not fully informed as to the facts?—A. I don’t know,
Mr. Shaw, whether I ought to answer that question, because the directors are
at present charged with conspiracy.
The VicE-CHAIRMAN: We have exceeded our time, as it is past one o'clock,
and if Mr. Shaw will suspend now he will have the privilege of being the first to
examine Mr. Edwards at the next sitting.
I have to inform the Committee that I have received from Mr. Ladner a
notice of motion that at the next sitting of the Committee he will move
“That in the opinion of this Committee the Bank Act should be amended
in order to provide for the establishment in the chartered banks of Canada of
a special savings account or other class of accounts for savings deposits in
addition to those now existing, whereby all holders of deposits in such special
savings account in any one bank, or branch thereof, shall be protected or guar-
anteed against loss up to the sum of $3,000 according to a similar principle as
that now provided for in Sections 62 to 69 inclusive of the Bank Act relating
to the protection of bank notes by the establishment of a fund known as the
[Mr. George Edwards.]
BANKING AND COMMERCE 39
APPENDIX No. 1
Bank Circulation Redemption Fund, or that such special savings account be
etsablished:in accordance with some other principle of insurance, the premium
of which will be paid by the depositors or the chartered banks of Canada, or
both, or in such other manner as the Committee may consider capable of giving
reasonable protection to depositors of money in savings accounts in such sums
as the Committee may determine.”
This will, of course, remain on the table as a notice of motion until the
next sitting of the Committee, and will be printed in the Order Paper for that
sitting. I may say, however, that the question has been raised in my mind as to
whether this is in order while a similar motion is pending before the House
itself.
Mr. Lapner: It is finished before the House.
The Vick-CHaiRMAN: It still stands on the Order Paper.
Mr. Lapner: I can very easily change it from $3,000 to $3,001.
The Vice-CuHairMAN: I do not wish to discuss this matter now but simply
draw Mr. Ladner’s attention to it so that he may be prepared at the next sitting.
Mr. Lapner: I will be prepared.
The Vicze-CHamRMAN: At the next meeting we will continue with Mr.
Edwards’ examination and Mr. Finlayson will also be in attendance. I may say
that Sir William Stavert is here to-day and inasmuch as Mr. Finlayson is always
in attendance I would suggest when we have finished with Mr. Edwards we
proceed with the examination of Sir William Staver. I may say that we sent
telegrams to-day to Mr. Williams asking him to attend on the 20th, and to
Mr. Pole requesting him to be here on the 22nd, but we have as yet received
no reply from them.
The Committee adjourned.
Room 231,
Hovusr or CoMMons,
Tuurspay, May 15, 1924.
The Select Standing Committee on Banking and Commerce met at 11.00
o’clock a.m., Mr. Vien presiding.
The Vicr-CHarRMAN: I beg to communicate to the Committee that yester-
day the House concurred in the report of the Committee that the Committee
be granted leave to sit while the House is in session.
We have received a telegram from Mr. Skelton Williams in the following
terms :—
RicHMOND, Va.
S. P. Gorpon,
Bank Committee.
“Telegram received today should your Committee desire I will be
pleased to arrange to appear before Committee for purpose stated, at
noon Thursday twenty-second instant upon arrival New York Central
train number twenty-one due Ottawa eleven fifteen morning, returning
South New York Central train number eight leaving Ottawa four twenty-
five same day. Please telegraph promptly if this should be convenient
to your Committee.”
40 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
We had decided that we would invite Mr. Williams to appear on Tuesday
the 20th, but as he is unable to come until the 22nd, we wired him:—
“Your telegram received cancelling my telegram to you earlier in
day. Proposed arrangement quite satisfactory. Committee will be
pleased hear you day and hours suggested by you. Please come Banking
Committee, House of Commons immediately on arrival.
(Sgd.) W. G. MITCHELL,
Chairman.
Under these circumstances, we immediately telephoned to Mr. Pole asking ~
him if he could come on Tuesday. We had previously wired him to appear on
Thursday.
Mr. Heaty: Do I understand that Mr. Williams will get here on Tuesday?
The Vice-CHAIRMAN: We wired him inviting him to appear on Tuesday
but he tells us he cannot come until Thursday.
Mr. Hearty: He will not arrive until 1 o’clock on Thursday.
The Vice-CHatrMan: 11 o’clock, I am told.
Mr. Hieaty: The train gets in at 12.15, and as there will be daylight saving
next week, that means 1.15.
The Vicr-CHatIrMAN: The telegram states that the train is due in Ottawa
at 11.15 in the morning. We telephoned to Mr. Pole, and Mr. Pole wired
back:—
“Shall be pleased to appear before House of Commons Banking
Committee on date mentioned.”
Therefore, on Tuesday next, we will have Mr. Pole, who is the National
Bank examiner.
Mr. W. F. Mactean: A Government nominee?
The Vice-CuHairMAN: Yes, he is under the Comptroller of Currency there,
and is the inspector of the National Banks. Therefore, the programme will be,
according to that, that on Tuesday next we will hear Mr. Pole, and on Thursday
we will hear Mr. Williams.
Mr. W. F. Macizean: We will sit in the afternoon, if necessary.
The VicE-CHAIRMAN: Yes.
Mr. Goon: I think we ought to have a clear understanding as to Mr. Wil-
liams’ coming and going. If we cannot have him until 3 o’clock on Thursday,
it seems that he will have to leave soon after 4 o’clock, and it would be prac-
tically useless, in these circumstances, to have him at all.
The Vice-CuarrMan: I think it will be advisable when these gentlemen
come, for the Committee to adjourn for a brief recess at noon and sit again,
say at 2 o’clock. Perhaps on the previous day we could decide to sit at 10
o’clock in the morning instead of at 11 o’clock.
Mr. W. F. Macitean: We will leave that to you, Mr. Chairman.
Mr. SpeaKMAN: Will daylight saving be in force next week? If so, it will
mean an extra hour.
The Vicn-CHaIRMAN: I believe so. If there are no notices of motions, we
will continue with Mr. Edwards’ evidence.
BANKING AND COMMERCE 41
APPENDIX No. 1
Grorce Epwarps, recalled.
By Mr. Shaw:
Q. You were speaking yesterday, Mr. Edwards, at the time the Committee
adjourned, about the question of the ignorance of the directors with regard to
the real affairs of the bank, and you were of the opinion that the amendment
which you suggested last year would provide some assurance that the directors
were fully informed?—A. Yes.
Q. And I think you had mentioned that what had struck you was the fact
that the Merchants Bank directors knew so little of the affairs of the bank?—
A. Yes.
Q. And that was the reason for the amendment?—A. It was.
Q. I called your attention to the apparently full knowledge that the
directors of the Home Bank had as to the real situation, but I do not know
that I got your answer to that suggestion—A. I would not say it was conclusive
that the directors of the Home Bank had full knowledge of the whole situation.
I think TI said, just at the conclusion of the session, that the directors were under
indictment for conspiracy and that the answers here might be prejudicial to
their rights.
Q. You think it might be?—A. Yes.
Q. Of course I do not want to do anything that would prejudice their
rights but may I put it in a negative form and ask you if you were not
impressed with their lack of knowledge of the situation?—A. I think I was; I
was impressed with their lack of comprehension of the situation, as it affected
the condition of the bank.
Q. That is different. You mean you were impressed with their failure to
understand their obligations?—A. The significance of what was there.
Q. But so far as the fundamental facts were concerned you would, I think,
be prepared to admit that so far as you could observe—and you are but giving
your own opinion, of course—they were pretty fully informed?—A. I think the
outstanding matters were within their knowledge.
Q. Now, another thing which seemed in last year’s amendment to be of
special significance to you was that provision providing for the rotation of
auditors?—A. Yes, I think so.
Q. In other words your idea is, as I take it, to have a man changed from time
to time after he has had an opportunity of gathering experience as to the affairs
of the bank, that is, that it is desirable to eliminate him and put in somebody
else who is thoroughly unfamiliar with banking practice?—A. I think that
would be an advantage, but my point was that I think a new, fresh, unprejudiced
point of view brought upon it by another auditor would be an advantage; he
might see things differently.
Q. In other words you give that priority over the value that increased
ee which experience would give an auditor, of the bank’s affairs?—A.
es, I do.
Q. You were also of the opinion that the certificate which the auditors have
to give under the amendment is of very great value also?—A. A very much
better certificate.
Q. I will read you a certificate given by one bank auditor as to the condi-
tion of the bank before this amendment came into effect. This is what it says:—
“Tn accordance with subsections 19 and 20 of section 56 of the Bank
Act, 1913, I beg to report as follows: The foregoing balance sheet has
been examined with the books and vouchers at the Head Office, and with
the certified returns from the Branches, and is in accordance therewith.
I have obtained all needed information from the officers of the bank, and,
[Mr. George Edwards.]
42 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
in my opinion, the transactions coming under my notice have been within
the powers of the bank. The cash has been checked and the securities of
the bank verified, at its chief office, both on the 31st of May, 1923, and
also at another time during the year. The cash and securities of one of
the branches have also been checked, and in each case they have agreed
with the entries in the books of the bank with regard thereto. In my
opinion, the above balance sheet is properly drawn up so as to show a
true and correct view of the state of the bank’s affairs, according to the
best of my information and the explanations given to me, and as shown
by the books of the bank.”
That is a pretty complete auditor’s report, and yet if you examine it
closely it is defective. I have examined it fairly closely with reference to the
provisions now required, and I am frank to say that I cannot see any substitute,
Mr. Edwards, and I would like you to point it out. You know what that is?
That is a certificate by the auditor of the Home Bank on the 31st of May last.—
A. I do not recognize it, but I have no doubt that is it.
Q. Can you tell me how—A. In the first place I cannot carry all the
points in my mind. I have no copy of the 1913 Act, in which the old audit
provision occurs, with me, but the first point was the reference to subsections 19
and 20 of the section. Now, the auditor distinctly states that he had conformed
to this section. That, in my judgment, is not a wide enough statement to cover
everything that is of importance in auditing the affairs of the bank, but it may
be as far as the auditor could go without exercising his own independent judg-
ment and going on beyond the scope of the audit provision in the Act. Those
sections, as I remember them, provide for certain definite things to be done. He
must check up the balance sheet with the books; he must see that the securities
are properly recorded in the books and are according to the books—
Q. Mr. Edwards, perhaps I can elucidate in this way; you have before you
the 1923 amendment. You will find at the top of page 27 the certificate which
the auditor must state to the shareholders in this report; ‘ (a) whether or not
they have obtained all the information or explanations they require.” That is
covered in the certificate I have read, and, “ (b) whether in their opinion the
transactions of the bank under their notice have been within the power of the
bank.” The auditor of the Home Bank stated that, did he not?—A. Yes.
Q. And then, “ (c) whether in their opinion the statement referred to in
their report discloses the true condition of the bank.” Now he says, “In
my opinion the above balance sheet is properly drawn up so as to show a true
and correct view of the state of the bank’s affairs” ?—A. According to the books.
Q. “According to the best of my information and the explanations given
to me’ ?’—A. According to the best of his explanation and the information
given to him. The information he is entitled to obtain under the old Act is not
pan pay to enable him to give the certificate that is required under the present
ct.
Q. So you think the certificate itself will be a real assurance that now we
can depend upon the accuracy of the balance sheet furnished to the share-
holders?—A. The certificate pledges him at the present time to use every means
that occur to him or that he thinks necessary to satisfy himself as to the con-
dition of the bank.
Q. He did not have that power before?—A. Hle did not.
Q. I think you must admit the statement given to the Home Bank auditor—
—A. It is a very ingenious form of certificate, Captain Shaw, but it is not ample.
Q. Now, I understand from your examination by Mr. Marler that the
objection to bank inspection, if any there be, is that it involves the question of
Governmental responsibility in case of loss?—A. It may.
(Mr. George Edwards.]
BANKING AND COMMERCE 43
APPENDIX No. 1
Q. Now, do you know whether that is the situation in the United States
where they have Governmental inspection?—A. My information as to the
United States system is that the Government are not responsible and do not
guarantee deposits.
Q. And assume no responsibility even though they inspect?—A, Quite.
Q. I want to just ask a few questions along that line. I think you will
admit, of course, that a bank is not a private corporation, but rather a quasi-
public corporation, is it not?—A. I understand that to be so. I perhaps have
not the full legal significance of the term, such as you would have.
Q. Well, let me put it this way. It differs from a private corporation in
the sense that there are obligations to the public?—A. Yes.
Q. And I take it that the interference, if I might use that word, not sug-
gesting anything improper—or perhaps I had better say the regulation by the
Finance Department and in the Bank Act is for the purpose of insuring that
that portion of its duties which has to do with the public is properly carried out?
—A. Yes, so far as possible.
Q. And the Government or Parliament under the Bank Act apparently
realized there is a responsibility to the public, to depositors, creditors and
others?—A. I should judge so.
Q. Now, would you say, Mr. Edwards, that under those circumstances
the corporation being as it is, the responsibility to the public being as it is, that
the Government should do everything within its power in order to see that the
corporation—that is, the bank—carries out adequately and safely their duties
to the public?—A. I do.
Q. And of course the other thing follows that the failure to do those things
would be the very thing which would involve the Government in any respon-
sibility there might be?—A. I assume so, yes.
Q. Then I take it this necessarily follows; that inspection is a thing which
the Government should do as an additional safeguard to see that the duties
to the public are properly carried out?—A. If the duty is laid upon govern-
ment, I think they should see it is carried out.
Q. I think you have admitted before that inspection is the proper safeguard
and a necessary safeguard?—A. Some form of inspection.
Q. And that it is only by doing everything that is necessary that the Gov-
ernment can relieve itself from responsibility—if responsibility there be?—A. ]
think that is a fair statement.
Q. So that my suggestion, Mr. Edwards, is this; that it is rather the lack
of inspection than inspection itself which will involve the Government in responsi-
bility?—A. Yes, I think that is true too.
Q. Now, you are aware, I take it, from the pamphlet issued by the Bankers’
Association—and you also know from your own knowledge—that the depositors
in a bank have a fourth mortgage?—A. Yes.
Q. That may not be putting it accurately legally, but that is what the
pamphlet says?—A. That is correct.
By Mr. McMaster:
Q. Is it in your knowledge who writes these anonymous contributions
distributed amongst us on behalf of the banks?—A. No, sir, I know nothing about
their authorship.
Mr. Maciean: Have we not a representative of the Bankers’ Association
here, who could perhaps tell us?
~The Vicr-CuarrMan: I think if you want to go into this matter, that might
properly be done a little later.
1—16
(Mr. George Edwards.]
44 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Shaw:
Q. In any event you know from your knowledge of the Bank Act that first
of all there is the responsibility to noteholders?—A. Yes.
Q. And secondly, responsibility to the Dominion Government?—A, Yes.
Q. And thirdly, responsibility to the Provincial Government?—A. Yes.
Q. And the depositors come in after these claims are satisfied?—A. Yes.
Q. Have you considered the matter of the elimination of any of these
priorities, in order that the depositors may thereby rank higher upon the assets
of the insolvent bank?—A. The subject of the abolishing of priorities of Govern-
ment has been considered by me, but I am not sure I have all the elements
necessary to a sound opinion on the subject. There may be reasons for main-
taining that priority that I have not taken into account.
Q. Let me give you the reason, as I find it, because it is given by Chief
Justice Coate, about 350 years ago. He said the King was busy in making wars
and making peace, and he did not have time to look after his revenue, and
consequently, he should be given priority, and as you can see, this is carrying
that principle of the King and the right of the Dominion, and the King and the
right of the Provinces into our Bank Act.—A. IJ think a little revision of that is
due.
Q. Would any unfairness occur if these priorities of the Dominion and
Provincial Governments were abolished?—A. Personally, I think not. I think
they might well be abolished without any hardship to any one.
Q. Then supposing they were not abolished, Mr. Edwards, would it not be
desirable and logical to carry that priority to every department of Government,
I mean, to the city and the School District, and the Municipal districts, and let
each one of them have priority likewise in addition to the Dominion and the
Provincial Government?—A. I presume so, but I assume that the distinction is
that the city is not the Crown.
Q. Quite right, but I mean in order to be logical should not that be carried
further?—A. If you consider the definition of the Crown as distinct from the
subject perhaps I ought not to speak too definitely about it. I have said that
I can see personally no reason why this priority should not be abolished, but
whether they should be extended or modified, I cannot say.
Q. Now, let us go one step further, Banks’ notes have first priority on the
assets?—A. Yes.
Q. And as an additional safeguard there is the Circulation Redemption
Fund?—A. Yes.
Q. Provided by the banks?—A. Yes.
Q. I would like to ask you, Mr. Edwards,—this being a matter of giving
further security to the depositors—how it would be if this bank Circulation
Redemption Fund was first called upon to satisfy the outstanding notes of the
bank and then the bank notes of insolvent banks to have first priority to the
extent unpaid? Do you gather what I have reference to?—A. Yes.
Mr. Hucues: Exhausting the Redemption Fund?
Mr. Suaw: Yes, exhausting the Redemption Fund and then let the bank
notes take priority on the assets of the bank until they are satisfied in full,
instead of as now, where the Circulation Redemption Fund is only called upon
in the event of the assets of the bank not being sufficient?
Witness: The difference would be that all the contributions of all the
other banks would be used to minimize that priority. I have not considered that
point.
{Mr. George Edwards.]
BANKING AND COMMERCE 45
APPENDIX No. 1
By Mr. Shaw:
Q. Do you understand the question?—A. I understand your question, but
I have not considered it.
Q. Perhaps some time when you have an opportunity to consider it, you
will let us know?—A. Yes.
Q. Have you any other method, Mr. Edwards, than the method you have
already suggested, and the suggestions we have had this morning for the further
protection of depositors?—A. You mean anything more than is at present in
the Act, I presume?
Q. Yes.—A. The only other thing that has occurred to me—and I mention it
with some diffidence—is some provision which might insure a larger realization
of double liability in the case of a bank ceasing to do business. At the present
time, the double liability of the banks is recognized to be ineffective to a con-
siderable extent, by reason of various circumstances. In the case of national
banks which have failed, I have been informed on very good authority that the
average realization of the double liability is about 45% of the amount for which
the shareholders should be assessed.
Q. Yes, in the United States?—A. In the United States. ‘I only say that
on other authority. In Canada it is well known that the full amount of the
double liability cannot be obtained; that is quite obvious. In the case of the
Home Bank there will be a very large shrinkage.
By Mr. W. F. Maclean:
Q. What percentage?—A. I would roughly say that the double liability of
a bank which has found it necessary to cease doing business and has therefore
afforded opportunities for people to relieve themselves of responsibility by
transferring shares and things of that kind, if they had any reason to suspect
weakness, that 50 per cent is a fair estimate of the value of the double liability,
50 per cent of the amount assessable.
By Mr. Hanson:
Q. Will you allow me to ask a question. Do you know what the percentage
was with respect to the Ontario Bank?—A. I have not the figures.
Q. I have been informed that in the case of the Bank of Yarmouth, 90%
was collected, and in the Ontario Bank, 93% was collected, which enabled them
to wipe out the obligations——A. That is information I have not got.
By Mr. Shaw:
Q. What is your suggestion then, with regard to this double liability matter,
Mr. Edwards?—A. I do not know whether it is practicable or not, but the line
of my thought was that there should be some responsibility for these shares being
in bona fide hands, some responsibility in that way. I do not know at all whether
it could be worked out, but I was thinking in that way.
Q. Now, I want to ask you if you made any investigation of the scheme of a
central or reserve bank of any kind?—A. I have not.
Q. You know from your knowledge, of course, as a man familiar with bank-
ing practice, that the Federal Reserve System, we will say in the United States,
necessarily lends security to the banking system of the United States—A. Yes.
Of course, the conditions are so very different that you cannot compare them.
Q. Quite right. I am speaking now of the conditions there, and that it lends
an elasticity in the granting of credits which the United States, at least, did not
have before the inauguration of that system.—A. Yes.
Q. You have not considered the possibility of applying some such principle
to the Canadian banking system?—A. In a sense the head office of every bank is
{Mr. George Edwards.]
1—163
46 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
a sort of Federal reserve bank for all its branches, and to the extent that that
fails, the Finance Act supplements it.
Q. You would realize, of course, that the War Finance Act is an inelastic
organization which deals with matters in a manner which is always more or less
the same. That is, securities are provided, and money is loaned at certain rates.
—A. My reading of the Finance Act leads me to the belief that the method is
pretty much the same. That is to say, a bank brings its securities, the Bankers’
Association committee passes upon the value and the merit of them for the
purpose of advancing the money, and the advances are made. The Finance
Department or the Government receive adequate collateral. That is, in sub-
stance, the Federal reserve system, as I understand it, in the United States.
Q. Of course there is no use of the discount rate for the use of stabilizing
conditions?—A. Not that I know of.
Q. No effort to check inflation or deflation?—A. Not so far as I know. I
do not know whether it is actually done, but the Act does not contain any
suggestion of that.
Q. Because the rate of interest, of course, is necessarily a permanent rate;
it is a fixed rate——A. It is a minimum rate, is it not?
Q. The maximum rate is fixed, I think —A. Yes, the maximum.
By Mr. Hughes:
Q. Mr. Shaw has given me permission to ask a question. One of his
questions was as to whether the Federal Reserve Bank in the United States
gave an elastic credit, whether it made the credit more elastic, and your answer
was yes. I would also like to ask whether or not it makes the currency more
elastic. They have an inelastic currency in the United States and I would like
to ask whether the Reserve system there lends itself towards making the currency
more elastic than it otherwise would be—A. I would not be able, Mr. Hughes, to
give you an opinion you could depend on in that regard; I have not studied that.
Q. Would you give me an answer to this. The currency of Canada is more
elastic, that is the note issue is more elastic, and the currency is therefore more
elastic than in the United States—A. I would not like to offer an opinion on
that point either.
Q. I wanted to ask one other question in connection with Mr. Shaw’s ex-
amination, then. One of his questions was, if I remember correctly. ‘Would
you approve of the change in the auditors every two years, bringing in a new
auditor unfamiliar with banking principles?” and I think you said—A. I do not
regard the familiarity with banks as an outstanding qualification for an auditor.
I think he must have general training and business capacity.
Q. You seemed to assent to that, and you gave me the impression that you
did not quite take in the meaning of the question —A. Very often an auditor can
do better work on a given proposition if he knows nothing at all about it.
. _Q. No auditor would be employed entirely unfamiliar with banking prin-
ciples?—A. Every auditor is familiar with banking principles to the extent ne-
cessary to enable him to conduct an investigation. The chartered accountants
undergo preparation of that kind.
By Mr. Coote:
Q. Mr. Edwards, would you say that the chief value of an auditor, a bank
auditor, is in his ability to determine the value of the security which is behind
each loan of the Bank?—A. The chief value of a bank auditor, or rather I should
say the value of a bank auditor is in his ability to understand and co-relate
everything he examines in the affairs of the bank, necessary to determine its
final position, and one of these faculties which he must possess is the faculty of
arriving at convictions with reference to the value of securities and loans,
(Mr. George Edwards.]
BANKING AND COMMERCE 47
APPENDIX. No. 1
Q. You would not care to say that that is his chief value?—A. If that were
the only thing an auditor could do, it would have very little value unless he
could relate it to all the other work he would have in connection with the bank.
The final result of an auditor’s work can only be told when he assembles his
conclusions along various lines, to see what result it gives him.
Q. I understand that Sir Thomas White made a statement to the effect
that he did not put very much value in the ability of the ordinary auditor to de-
termine the securities held by a bank; he would much prefer to have the benefit
of a practical banker in determining the value of the security —A. Sir Thomas
told me yesterday—he was good enough to say that he intended to modify that
view, and he appears before the Home Bank Commission today.
Q. That is after consultation with yourself?—A. No, not at all, he just in-
formed me he had modified his views.
Mr. McMaster: Sir Thomas should be prepared to learn from all quar-
ters possible.
Mr. W. F. Maciean: He is learning.
By Mr. Coote:
Q. Are you familiar, Mr. Edwards, with the annual meetings of our charter-
ed banks at all? That is, with the number of shareholders who attend the annual
meetings?—A. Only from the reports of attendance in the published state-
ments.
Q. Would you agree that the number attending the annual meeting is a very
small percentage of the shareholders of fhe Bank.—A. Yes.
Q. And the audit that is conducted is now called a Shareholders’ Audit ?—
A. Yes.
Q. Having in view that fact of such a small percentage of the shareholders
attending the annual meetings where these auditors are appointed, has the or-
dinary small shareholder of the Bank really any say in the choosing of the
auditor who is supposed to protect him?—A. He has, if he exercises his right,
if he attends the meeting or gives his proxy to someone he can trust to properly
represent him. He certainly has the power, and if he does not exercise it it is his
own fault.
Q. Take the case of shareholders who live, say, in Western Canada; would
it be reasonable to expect them to pay their expenses all the way to Montreal
to attend a shareholders’ meeting?—A. No, but they could be represented by
some one in whom they had confidence, to speak for them.
Q. If they could find some one, yes. Would they be entitled to appear
there as proxies if they were not shareholders?—A. No, I think not; they have
to be shareholders themselves.
Q. Referring to a question which Mr. Shaw put to you, regarding a prior
claim on the Bank of the note holders, could you give me any good reason why
the note holders should have a preferred claim on the Bank over the depositors?
—A. I think so; I think the reason has been given often enough, and that is
that the notes are passed from hand to hand, and a man is practically obliged
to take them in payment of anything, or have a certain amount in his posses-
sion.
Q. Does the law of this country compel him to take that in payment of a
debt?—-A. I presume not.
The Vicr-CHAIRMAN: The question whether a legal offer may be made by
_ bank notes is a matter of civil rights, which determines what is a legal offer,
and this is a matter of provincial legislation.
{[Mr. George Edwards.]
48 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Coote:
Q. You are not in a position to answer that question?—A. I would not care
to put my opinion on record about the extent to which bank notes are legal
tender, but I think it is in common practice; bank notes are accepted without
any hesitation, by people in payment of debts.
Q. But you cannot give me a definite answer as to whether or not it is
legal tender?—A. Without further posting myself, I would not like to answer
for the moment.
Q. Can you give me any assurance, or would you say that our bank notes
now are absolutely guaranteed?—A. Yes.
Q. In what manner?—A. First, by the circulation redemption fund, and
secondly by the priority of the assets of the bank.
Q. The priority on the bank is the first claim, is it not?—A. The first claim.
Q. And the bank circulation fund is the next, or the shareholders’ double
liability is second?—A. No, I think the claim is against the assets. I do not
know whether the circulation fund has had to be resorted to so far.
Q. If the assets of the bank were not sufficient to pay the notes outstanding,
can you tell us whether the shareholders’ double liability could be used for that
or not?—A. I could not answer that question.
Q. Supposing the two together, the assets and the double liability, were not
sufficient to meet the notes outstanding, then the bank circulation fund could
be called upon?—A. I would say yes. You are stating a very extreme case. I
do not think it ever occurred to me to consider that such a case could happen.
Q. If that were not sufficient, then who would pay the balance of the notes?
—A. I could not tell you.
Mr. Spencer: Mr. Chairman, it is quite impossible for us to get the answers
of the witness.
The VickE-~-CHAIRMAN: I would request hon. members of the committee to
listen to the evidence, otherwise it is hard for the witness to speak loud enough.
At our first sitting in the other room some hon. members complained that the
room was too small. We might complain that this one is a bit too large for
the witness to be heard in every quarter, particularly if hon. members converse
between themselves. We will ask Mr. Edwards to do his best, and I am sure
the hon. members will co-operate. I would suggest that if any hon. member
is desirous of questioning the witness for any length of time he should come in
front of the committee so that we may hear the question and the answer.
By Mr. Coote:
Q. I do not think I will be very much longer. There is just one more ques-
tion regarding the note issue. Is it not a fact, Mr. Edwards, that the total issue
of bank notes is considerably in excess of one hundred million dollars? I have
forgotten the figures——A. I think it is, yes.
Q. And the total in the circulation redemption fund is a trifle over six mil-
lion dollars?—-A. Yes.
Q. Would it not add to the safety of depositors if the claim of the note
holder, the prior claim of the note holder on the assets of the bank were abolished?
—A. I have not considered that; I thought the theory had been so well advo-
cated that it did not oceur to me to consider the possibilities of that.
Q. That is, advocated from the note holders’ standpoint, but not from the
standpoint of the depositors?—A. Well, I have been unable to see why the note
holders’ priority should be abolished.
Q. I take it that you are not a depositor in the Home Bank; you may have
been a note holder.—A. I do not think I was a note holder.
(Mr. George Edwards.]
BANKING AND COMMERCE 49
APPENDIX No. 1
Q. I am considering this question from the viewpoint of the depositor who
deposited in the Home Bank in a locality in which the Home Bank was the
only bank. I think it is only fair to say that it was nearly the only place that
was available really for savings. Can you state from your experience, Mr.
Edwards, whether a bank is in a sound position, or rather whether an auditor
can state that a bank is in a sound position when he has only examined the
head office of that bank? Having in view a case where a bank has, say at least
40 per cent of its branches located 1,000 miles or more from its head office —
A. My view is this, that with a personal examination of the head office of the
bank and the few principal branches, he is entitled to place pretty fair reliance
on the information that reaches the head office from the managers of the
branches, from the inspectors and the men that are sent around to obtain a
knowledge of the bank’s outside business. And he could, by inspecting the chief
office, and analyzing that information that comes to him, and determining its
quality, see pretty fairly what the position of the bank is.
Q. Why could he not tell the position of the head office by simply questioning
the men who inspect it?—A. That would be a part of his work. The head
offices are not necessarily included in the inspection system. They may be in
some cases, but the inspection system is really inspection of the operating
branches of a bank.
Q. Does not the shareholders’ auditor as thoroughly inspect a head office as
he does the branches?—A. Oh, yes, but I was referring to the internal system of
inspection.
Q. Only internal?—A. Quite.
Q. Is that because such a large proportion of loans is made at the head
office?—A. You must distinguish. At the head office there is likely to be the
largest branch of the system. In Montreal, for instance, there was the head
office of the Merchants Bank, and the Montreal office of the Merchants Bank.
The head office did no business with the public. The Montreal office did the
business with the public. The Montreal office is therefore a branch, not the head
office. The head office does not come in contact with the public; only its
branches.
By Mr. Hanson:
Q. Mr. Shaw questioned you with respect to the relationship between
securities and deposits. I should like to know from you, having regard to your
study of the Federal system as to what security there will be by reason of the
system itself.
Mr. Irvine: I rise to a point of order. Mr. Coote was getting information
from the witness.
By Mr. Coote:
Q. In regard to the statement which you made to Mr. Shaw as to the
position which the head offices of our banks occupy in relation to the Federal
Reserve Bank—A. They perform the functions to some extent, that is, the dis-
tribution of money where it would be required.
Q. Are the loans at the head offices of those banks larger than the deposits?
Is that not a fact?—A. It is true, very largely.
Q. Is that the case in regard to the Federal Reserve Banks? Do the Federal
Reserve Banks loan more money to the branches than they receive from them,
or do they not? Do you know?—A. I cannot say. I think necessarily that it
must be that the remote banks in the United States under the Federal Reserve
System obtain money from central banks as they need it for loaning purposes.
By Mr. Marler:
Q. Would Mr. Coote permit me to interject a question? I understand you
to say, Mr. Edwards, that the loans from the head office were larger than the
[Mr. George Edwards.]
50 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
deposits?—A. The loans at the head office are larger than the deposits? The
‘head office makes no loans and accepts no deposits.
Q. Taking an analogous case like the Merchants Bank of Canada, the loans
in Montreal would be largely deposits in the Montreal office. That is quite
distinct from the head office. The head office does not make any loans at all?—
A. Quite.
By Mr. Coote:
Q. How would you explain the large deposits at the head office if they do
not make any loans? Or is this a play on words? The head office and the chief
office?—A. I am considering how to get the idea across. The head office makes
no loans; the head office is the controlling body, and if anything doubtful arises
in the administration of a bank it is likely to drift into the head office or come
under the immediate notice of the head office and be found at the nearest branch
to the head office; that is the branch operating under the same roof. The
policy of a bank would be to keep the outside business in as healthy a condition
as possible, and to keep any doubtful matters closely under their own super-
vision,
Q. They keep very careful supervision over the branch offices?—A. As a
rule they do; there have been exceptions, of course.
Q. They place a limit on the amount which a branch manager can loan, 7
presume?—A. Yes.
Q. That amount would be fairly smal] in the case of small branches? Or
are you familiar with it?—-A. It may be large or small. A large industry near
a branch would probably negotiate a large loan; it does not always follow, of
course.
Q. The loans which have wrecked some of our banks in the past have been
large loans at the head office of the bank, is that a fact?—A. Yes, I think so.
Q. Would it then be some safeguard of the depositors if the amount of
money which a bank might loan to any customers were limited to a percentage
of the paid-up capital of that bank?—A. Personally, I do not think that is a
practicable limitation. It would hamper some very legitimate and proper
banking operations.
Q. If it were practicable, would it not assist in safeguarding the depositors?
A. In this way, it would distribute the risks, and therefore the losses would be
smaller when they did occur.
Q. They would not be very liable to occur, would they?—A. If the bank
had its risks more widely distributed, the losses would be more numerous, but
not so important.
Q. May I ask you a question in regard to the Banque Nationale?—A. 1
have said that I am not familiar with the Banque Nationale, excepting from the
information I have had access to in the Department.
Q. Possibly you can answer this question from that. Is it not a fact that
a loan of possibly twice the capital of the Banque Nationale was made to one
industrial concern?—A. I understand so, yes.
Q. If we had such a clause in the Bank Act as I am suggesting, to limit
the power of a bank in regard to any one loan; do you think a loan of that
size would have been contributed by any of the banks to this industrial concern?
—A. In the light of present knowledge, I think not; but it is pretty hard to say
what the circumstances were that prompted the Banque Nationale to give such
.a loan to that industry.
Q. If it were not permitted by law to make a loan of that size, it would
never have occurred?—A. It was an exceedingly imprudent thing to make an
advance of that size, considering the extent of its resources.
[Mr. George Edwards.]
BANKING AND COMMERCE 51
“APPENDIX No. 1
Q. Is it not fair to suggest that if such a limitation were inserted in the
Bank Act, it might prevent some bank losses, if not failure?—A. It might not
be a real protection, because if a bank was determined, for instance, to support
an industry, that industry conceivably could be split up into several subsidiary
companics, and each have a portion of the loan, and perhaps disguise it, and
perhaps make the situation worse.
Q. You think it could make it worse?
By Mr. McMaster:
Q. Mr. Edwards, is it, or is not, consonent with good banking that any one
loan should only be of a certain moderate size in proportion to the capital and
reserve of the bank?—A. Oh certainly.
Q. Will you explain to us why, if that is consonent with good banking, it
would be impracticable to have it embodied in the law?—A. Because any
particular limit you might fix in the law might work hardship. You cannot
decide on the absolute merits of a case before having the facts before you; and the
directors and the general manager are the proper judges as to those circumstances.
By Mr. Coote:
Q. Some members ask, on whom would this hardship be worked? Would
it work a hardship on the banks? —A. On a legitimate industry.
Mr. W. F. Mactean: Would it be on the poor depositors?
By Mr. Coote:
Q. The banks say that it is only their business to advance money to a con-
cern for its current operations, not really to furnish it with funds to build up the
industry?—A. I should not think that a bank should furnish funds to any
company for the purpose of investing on capital account, or anything of that
kind; it should be for current purposes only.
Q. Do you really think it is sound banking practice for any bank to advance
more than its paid-up capital, to risk it in any one loan?—A. No, I do not.
Q. Do you see any reason why this Committee should not put that in the
Bank Act?—-A. The matter was considered last session. I believe there is a
clause for, the purpose of limiting that. In other words, there has to be a
certain voice of the directors before such a thing can be done.
Q. We have already found out that the directors do not direct. I think
that has been freely admitted?—A. I think you must be thinking of conditions
previous to the passing of the Act last session.
Q. No, I remember quite well the amendment passed last session?—4A.
There is no evidence during the past twelve months that directors are not
directing, Mr. Coote.
Q. In your opinion, the directors we have now are really directing those
banks?—-A. I think there is a larger realization of their responsibility, and I
think they are more earnestly applying themselves to the task of directing
their banks.
Q. Do you think that the director of any bank which has 40 per cent of its
loans outside of Canada can really be well acquainted with the true condition
of the bank?—A. I think he may, if his means of information are sufficient, and
if the information can be made sufficient.
Q. On whom is he relying for this information?—A. He will rely upon his
general manager.
Q. The general manager furnishes him with the fullest information?-—-A.
And collateral information, of course; reports, and he may have personal
knowledge. It is pretty hard to say just what considerations would enter into
(Mr. George Edwards.]
62 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
the mind of the director, or how far his knowledge goes with reference to
transactions of that kind.
Q. What possible knowledge would he have of loans, for instance, in Cuba
and other West Indian points?—A. Well, these loans are all reported upon by
the managers of the Cuban branches, by inspectors who are going over the
accounts all the time; and directors very frequently take trips there and
investigate conditions on the ground. I have known that to be done.
Q. Yes, Mr. Edwards, but you would not surely try to lead this Committee
to believe that the bulk of directors, or all of the directors, can make those
trips?—A. I do not know why they cannot. I do not suppose they do, but I
suspect that certain directors will make the trips, and the other directors will
place a certain reliance on them.
Q. There are certain directors who would be principal directors, and the
others would be lesser directors?—-A. They may have directors more fitted for a
certain duty than other directors.
Q. The duty of directors is to safeguard the interests of the bank, is it not?
—A .Yes.
Q. Do you see any objection to directors, each year, furnishing a sound
statement to the shareholders at the annual meeting, stating what their opinion
is in regard to the affairs of the bank?—A. I think that would be very desirable,
if they did. I think they subscribe to the report. I think they are committed
already in the procedure as it stands now.
Q. It seems to me, Mr. Edwards, that as it stands now, you are asking a
director who possibly lives in Winnipeg to certify to something he knows nothing
about, except by hearsay?—A. If he agrees to accept that responsibility, Mr.
Coote, I do not know why he should not. That is his privilege as a director of
the bank. It must be assumed that he is doing it intelligently, and sincerely,
whatever he does.
Q. Is that not assuming a good deal? Let me ask you another question.
Would you, Mr. Edwards, as a bank auditor, say that you could judge the true
condition of affairs of any bank carrying on 40 per cent of its business outside
of Canada, if you only examined its chief office or head office?—A. My answer
to that would be, it would depend on what information I could obtain with
reference to the business outside of Canada. If the information was sufficient
to satisfy me, I could.
Q. One more question with regard to the liability of directors. Would it
not be quite proper to increase the financial liabilities of directors over that
which is now provided in this Act?—A. Well, directors, of course, are already
under the Act under certain liabilities that do not attach to the ordinary share-
holder. As a rule directors are amongst the largest shareholders of the banks,
and if anything goes wrong with it, they would be the largest individual losers.
The double liability provisions will fall most heavily upon them. It is natural,
I think, that the small shareholder should trust the large shareholder who
might happen to be a director, and who is put in that position because he
believes his individual interests are great enough to permit him to look after
the affairs of the bank.
Q. A kind of blissful trust?—-A. You have to trust somebody. Somebody
has to be trusted in this world.
Q. Would it not be putting real teeth in the Bank Act if we stated that
any director’s property to the extent of 50 per cent of his estate would be
turned over to assist in the liquidation of the bank if it failed?—A. I cannot
offer any opinion as to that. If a director does his duty honestly, sincerely and
intelligently, I do not know at the moment why he should be penalized, because
after having done that, he happens to be a director.
(Mr. George Edwards.]
BANKING AND COMMERCE 53
APPENDIX No. 1
Hon. Mr. Ross: What would you do in a case of a director who did not
have any estate?
Mr. Coors: He would be just in the same position as he is in now.
By Mr. Coote:
Q. At the present time, is there anybody besides the Minister of Finance
and his officers who know anything about the true condition of the banks? I
will change that question: do you think that the public, or the depositors, have
any opportunity of knowing?—A. I think that as a rule the statements made
by the banks are entitled to be depended upon.
Q. Would you, Mr. Edwards, really ask the public to take that statement
at its face value?—A. The statement I have just made?
Q. Yes.—A. I do not know why not. You cannot do business at all unless
you trust somebody, unless you give some value to the statements that are
made by responsible people, or by people you believe in.
The last statement issued by the Home Bank did not disclose to the public
that it was not in a sound condition—A. That is an exception which is said
sometimes to prove the rule.
Q. Yes, but is that the only assurance the public can have that that is the
rule?—A. Well, under the present Act they will have the assurance of trained
auditors, two of them acting independently, and other safeguards which are
provided by the Act. I think that is a very great advantage.
Q. I think you admitted yesterday that some system of Government
inspection might be wise?—A. As a logical sequence of what is there, yes.
Q. After the Government has made that inspection is there any reason why
the Minister of Finance should give the Parliament each year a statement
that these banks have been inspected?—-A. No. I think he could do that.
Q. And further, that in his opinion these banks are entitled to the con-
fidence of the public, or that they are not?—A. I do not know how far the
Minister would be disposed to go into that, but if I were called upon I would
not advise him hastily in the matter. I would not answer that question with-
out some thought—as to how far the Minister might go.
- Q. From your experience, Mr. Edwards, in examining these banks, could
you tell the Committee whether it is or is not a fact that these banks have
many branches which are not paying expenses?—A. Every bank has some
branches which are not paying expenses. As a rule, where a branch is a con-
sistent loser, the bank will close it up. They are closing branches frequently,
and opening others.
I understand our banks opened about nine hundred new branches in the
year 1919. ®
Q. Is it your opinion that the majority of these branches have shown an
operating loss since they were opened?—A. To my mind it represents a desire
to give service, if it can be given without loss, and having ascertained it could
not be given without a loss there have been withdrawals in certain cases. That
indicates good business judgment.
Q. Is it the chief desire of these banks to give service or make profit?—
A. Both. They must give service in order to make a profit; they cannot make
profits without giving service.
Q. But they are more eager to make profits than to give service?—A.
They must make profits, of course.
By Mr. Maclean:
Q. You have spoken of priorities, and amongst these you said were the
bank notes, and you also referred to the National Reserve System in the
A (Mr. George Edwards.]
54 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
United States, the American system. Will you say that any man who has
a note that he has received from a bank in the United States would have to
go to another place to get his money, even when the bank fails?
Mr. Hucues: Of course, they are guaranteed by Government bonds.
By Mr. Maclean:
Q. No, they are Government notes, and once the public has a Govern-
ment note from the bank they do not have to run to somebody else. Is that the
case?—A. No.
Q. What is the case?—A. The case is that the bank deposits security with
the Government and receives in return therefor the privilege of issuing their
own notes, which on the face are national bank notes.
Q. Is that the case in Canada?—A. You know what the situation is in
Canada. It is priority of a bank’s assets, and there is a circulation fund to
supplement it. It is equally as effective as the other.
Q. No, it is not. They give it a discount and no one will take the bank’s
notes when the failure occurs.—A. All notes of a failed bank are worth more
than those of a solvent bank, because they carry interest.
Q. Would there be any harm if we had the banks in this country doing
business with national notes which would not be questioned under any condi-
tion?—A. I do not know that it would be better or worse. It is a matter for
consideration.
Q. You say that the Canadian system is equally as good as the American
system?—A. So far as the security of the note-holders is concerned, yes.
By Mr. Hanson:
Q. In what manner does the Federal Reserve System of the United States
render additional security to the depositors of National Banks?—A. If a mem-
ber bank requires more money it offers to hypothecate the securities for loans
already made to the Federal Bank, and having hypothecated them, they obtain
money on security.
Q. A member bank simply borrows from the Federal Reserve?—A. Yes.
Q. That does not give any additional security to depositors?—A. No, in
fact in tends the other way.
By Mr. Hughes:
Q. With regard to the note issues of the United States, when a national
bank purchases Government bonds, they lodge these bonds with the Treasury
Department and they are allowed to issue their own notes up to 90 per cent of
the value of these bgnds?—-A. That is correct.
By Mr. Irvine:
Q. There were two millions dollars, I understand, Mr. Edwards, worth of
notes out in the Home Bank outstanding?—A. Yes.
Q. And this was made up out of assets of the bank when the bank failed?—
A. Yes.
Q. In the event of the Redemption fund being called upon to pay that two
million dollars, would not that have protected the present depositors to that
extent?—A. I do not know. The banks which contribute to the circulation fund
would become creditors of the insolvent bank and rank along with the depositors
which would not, I think, improve the position of the depositors. In other
words, if the contributions to the circulation fund were taken to retire their notes
they would automatically become creditors of the insolvent bank, and would
rank pari passu with the depositors.
[Mr. George Edwards.]
BANKING AND COMMERCE 55
APPENDIX No. 1
By Mr. Shaw:
Q. Surely it would improve the position of the depositors?—A. I do not
know—
By Mr. Irvine:
Q. What would you do with the two million dollars?
By Mr. Shaw:
Q. You would have another two million dollars to add to the general fund?
—A. Yes. It is too much for my mental calculation, Mr. Shaw.
By Mr. Ladner:
Q. Do you know the operation of the Finance Act of 1914 for re-discount-
ing?—A. Generally.
Q. Have the banks taken any greater advantage of it since the last session
of Parliament—greater than they did before?—A. I could not tell you that.
I have not looked that up.
Q. I made this statement because I remember seeing something in one of
the reports of the bank that they felt more disposed now to take advantage
of the re-discounting facilities under the Finance Act, than they did prior to
the revision. Have you any knowledge of that question?—A. I have no doubt
of it.
Q. Is there any shifting of deposits, to your knowledge, since the failure
of the Home Banks, from the smaller banks to the larger banks, or from the
smaller banks to Government securities throughout the country?—A. I have
heard that is the case, but I have not confirmed it myself.
Q. Have you made any examination, prior to coming here, of the returns
by the banks under the Bank Act?—A. Not quite recently, no.
Q. Do you know that at the present time approximately 70 per cent of all
bank deposits are in the four largest banks?—A. I believe that is the case.
Q. And 30 per cent is distributed amongst ten other banks?—A. Yes.
Q. Do you know that in 1890 the figures were exactly reversed?—A. There
has been a tendency towards an increase of deposits in the larger banks.
Q. In view of the failure of the Home Bank and the concern of the public,
do you think that that tendency will continue?—A. I cannot say, but the pro-
cess of reduction in the number of banks has been going on. There are only
fourteen now, where there were seventeen last year, but whether that will con-
tinue or not, I do not know.
Q. Then taking the experience of the last thirty-three years as an index,
and taking present day events as you have seen them, with mergers and the
failure of the Home Bank, do you think it possible for the smaller banks to
reduce their overhead in the future?—A. I think it is a very serious question.
The expense element since the war has not come down.
Q. I am advised by a man skilled in finance in a practical way, that with
the establishment of branches it is difficult for any of the banks to materially
reduce their overhead. Have you any information to the contrary?—A. I have
not, at the moment.
Q. Do you agree with that statement?—A. I think it is a very probable
statement.
Q. Then, if you continue the transfer of the deposits to the larger banks by
reason of the shaken confidence of the people, do you not think that some
measure is essential at the present time to maintain the stability of the smaller
banks in order to retain them in the field of competition?—A. I think it is very
desirable, if they are sound.
[Mr. George Edwards.]
56 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Are the big fellows sound?—A. Yes, of course if a bank gets into a pre-
carious condition, other steps may be necessary.
Q. Most of us believe quite sincerely that the other banks are in a fairly
sound position?—A. I think so, too.
Q. In view of that tendency which is indicated also by the number of banks
being reduced, we know the figures of the past, but just before I come to a con-
clusion, I wish to ask, in view of the increasing capital, your opinion on that.—
The capital paid up in all the banks in 1890—all these figures are as at 3lst
December—was sixty million dollars, in 1900, sixty-seven million dollars,
and 1910, one hundred million dollars, and 1923, one hundred and twenty-three
million dollars, or an increase during the thirty-three years from 1890 of 84
per cent. Now, the bank clearings have increased during that time from 1893—I
have not the 1890 figures—
Mr. Mactan: Is that capital or reserve?
By Mr. Ladner:
Q. I have not the figures for the reserve. That is capital. The volume of
business has increased from nine hundred million in 1893 to seven and one-half
billion dollars in 1923. Now, if that tendency continues, do you think there is
sufficient capital to effectively serve the country in a banking way, if this
country develops?—A. I think the capital of the banks should be increased.
Q. Now then, do you think a measure such as guaranteeing a certain class
of savings accounts by creating a special account as I propose, of $3,000, for
all of the banks on the principle of insurance would be effective in stabilizing
the confidence of the people in all of the banks, small and large, and creating an
insurance fund and building it up on an insurance principle?—A. I think there
is plenty of experience to guide you in that. It has not succeeded so far.
Q. Can you name me one precedent anywhere in the world?—A. I think it
is pretty generally known that they tried to do it down in Oklahoma.
Q. That was a general guarantee of all deposits, and I hold that it is
impracticable—to guarantee all the deposits is out of the question. What I am
saying is to consider a deposit of $3,000 or under, leaving out existing banking
institutions and business as it stands. I do not believe in Parliament interfering
with the bankers any more than absolutely essential,—but creating a new class
of accounts so that its depositors may go there, and they will be told that they
will not get three per cent, perhaps, but get 2.7, or whatever it may be, and in
that way contribute a part to the premium and build up insurance funds, while
the banks would do the same. Do you think that a scheme like that will work
out, and will tend to stabilize the confidence of the public in our smaller institu-
tions.
Mr. Maruer: Does that rise out of this question on the reference?
Mr. Lapner: This all pertains to the Federal Reserve System, because if
we have a Federal Reserve System—
The VicE-CHaIRMAN: Yes, but the question of a Federal Reserve System is
now under advisement by the Chair in respect to a point of order.
Mr. LapNner: This also relates to the means of protecting depositors.
The Vicr-CHAIRMAN: I quite agree with the question insofar as it relates to
greater safety to depositors being in order, except that we have decided that we
shall first examine the witness on the question of bank inspection. Therefore it
is probably a little premature.
Mr. Lapner: I have been here for an hour and I have not noticed any very
clear relationship of the questions in regard to the examination as to bank
inspection.
[Mr. George Edwards.]
BANKING AND COMMERCE 57
APPENDIX No. 1
Mr. Maruer: You have a resolution before this Committee now.
Mr. Lapner: I have been leading up to the point of my whole matter. We
might as well get it, because I am going to be persistent in this.
The Vice-CHatrMAN: I do not believe, Mr. Ladner, that there is any
honourable Member who is desirous of preventing you from getting to that
point. It is only a question of procedure. If you would kindly put that question,
we will see whether it is in order.
Mr. Lapner: I have put it.
The Vicr-CHAIRMAN: Shall we have the question read or will you put it
again?
‘ Mr. Lapner: Perhaps we could have the reporter read it, as we do in Court
sometimes.
The Vick-CHAIRMAN: The reporter then will read the question.
Whereupon the reporter at the request of the Vice-Chairman read
the question under discussion in part as follows: ‘‘ That was a general
guarantee of all the deposits, and I hold that it is impracticable—to
guarantee all the deposits; it is out of the question. What I am saying,
is to consider a deposit of $3,000 and under, leaving out existing banking
institutions and business at it stands—I do not believe in Parliament
interfering with the bankers any more than absolutely essential—but
creating a new class of account so that its depositors may go there and
they will be told that they will not get 3 per cent, perhaps, but get 2.7 or
whatever it may be—”
The Vicre-CuairMANn: Will Mr. Ladner admit that another question a bit
shorter and more to the point would be better?
Mr. Marter: I make this particular point, that that question, being
answered, is subject to a cross-examination to the most unlimited extent, and it
is comprised in this particular resolution which is before this Committee. I
think he should defer it until that resolution is taken up.
Mr. Lapner: On the other hand it relates to the protection of depositors.
Mr. Maruer: Certainly, but this is not the proper place to bring it up.
The Vice-CHAIRMAN: I would imagine, Mr. Ladner, that we will make
more progress if we examine the witness on the question of bank inspection, and
then we shall come to the other matter which is more particularly covered by
your resolution.
Mr. Lapner: When I came in there was a general discussion on the Federal
Reserve system, there were all kinds of questions, and I thought it would be sort
of intelligent to proceed with mine. However, I will ask it later on.
The Vick-CHaIRMAN: I may say I let the questions be put because I
thought they were very incidental. At any rate, if you will put the question—
Mr. Heaty: Not to interrupt, but I understood from the witness yesterday
that the question of Government bank inspection, as far as his ability goes, was
closed; that he was in favour of it and would recommend it to the Government.
Mr. W. F. Macrran: And the Minister was here and acquiesced.
Mr. Hratrey: Should we not take it for granted that he has given us an
expert opinion on that? The bank inspection is closed, so why not take up Mr.
Ladner’s point.
Hon. Mr. Stevens: I rise to a point of order. I sat here the other day for
a couple of hours, and I have been sitting here this morning for an hour and
forty minutes, and I have listened with interest and patience to all the questions.
and to say that we are prevented from asking the witness another question on
(Mr. George Edwards.]
58 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
bank inspection would be most unfair. I submit to you, sir, that we should not
be prevented from asking further questions on that point.
Mr. Heaty: That is not suggested.
Hon. Mr. Stevens: Mr. Healy said he understood the thing was closed.
Mr. Heauty: As far as his own opinion goes, but I did not say you could
not ask another question.
Hon. Mr. Stevens: I have been waiting for a chance to ask Mr. Edwards a
few questions; I have waited a long time, and I will wait a week if necessary,
but I do ask for the opportunity of asking two or three questions.
The Vick-CHAIRMAN: Mr. Ladner, will you proceed?
Mr. Lapner: I have no questions on bank inspection; I have five questions
on double liability, but that is a separate matter altogether.
The Vice-CHAIRMAN: Very well; Mr. Marler, have you some questions?
By Mr. Marler:
Q. Just one question, Mr. Edwards. In the course of Mr. Coote’s examina-
tion, the question came up regarding the question of loans made by branches,
loans made by distant branches and loans made by principal branches. That
is to say, branches where the head office itself may be situated —A. Yes.
Q. Now the question also came up regarding the power of branch managers
to make loans; I think you remember that.—A. Yes.
Q. Mr. Coote did not pursue that subject at that particular moment. What
I want to bring out before this committee and what I want to ask is this. Is it
not the case that in any branch a loan of equal size can be made or negotiated
just exactly the same as if that loan were applied for in one of the large city
branches?—A. I think that is so.
Q. In other words, the branch manager may be restricted in making a loan
himself without reference to head office, but a reference being made to the head
office, that branch can get any amount it wants for legitimate purposes in
precisely the same way as a principal branch could get it from the head office,
in just the same manner? In other words, there is no distinction whatever
between loans by country branches and loans in so-called head office branches.
Mr. Sates: You do not mean for any amount?
Mr. Marier: Any amount that could be got in any branch can be procured
in a country branch for a legitimate purpose.
Mr. Heatry: That is perfectly right.
Mr. Sates: We often hear in the West that they have not any money;
they are not loaning.
Mr. Maruer: They have not any money to loan?
Mr. Sates: Yes.
Mr. Marter: I am astounded to hear that, because I have always under-
stood that providing security was put up at a branch, that branch has equal
facility with any other branch.
Mr. Sates: What do you mean by “ facility?”
Mr. Heater: I would suggest that we put Mr. Marler in the witness box.
Mr. Marter: I am quite prepared to do that; I have no objections.
The Vicr-CHairMAN: If it is the desire of the committee that Mr. Marler
be asked a question, I am quite willing to accede to it, but I think we will make
more progress if Mr. Marler goes on with Mr. Edwards. We have Sir William
Stavert who has been waiting since yesterday and again to-day, and I would
suggest that we go on with him.
[Mr. George Edwards.]
BANKING AND COMMERCE 59
APPENDIX No. 1
By Mr. Marler:
Q. In your opinion, Mr. Edwards, are the facilities offered at the smaller
i ngs equal to the facilities afforded at so-called head office branches?—
. Yes.
Mr. Coote: Just what do you mean by the word “ facilities?”
Mr. Marier: I mean access to the money of that particular bank.
Q. In other words, if a bank has so much money to lend, any branch has
equal facilities for securing a loan from that money as a so-called head office
branch?—A. Yes.
Mr. Hugues: In practice it does not work out.
By Mr. Cahill:
Q. I would like to ask Mr. Edwards if he believes that his answer to Mr.
Marler covers the point, by saying, “Yes”. Does he believe that the facilities
in the branch bank say at Okotoks, Alberta, are the same as those of the head
office of the bank at Montreal, or that the manager of the smaller bank has the
same power as the manager of the bank in Montreal who is immediately under
the supervision of the head office, of the general manager, and of the Board of
Directors? Does he think the man in Alberta has the same facility for getting
loans through the Bank of Montreal as the man applying for them in the city
of Montreal office, which is immediately under the supervision of the head
office.—A. Obviously the distance would require a little time to put it through,
but I think if there were an industry say in Montreal that was borrowing money
from one of the banks, and that industry should find it expedient to remove its
whole plant and machinery to Okotoks, they could transact their business in the
same way as they could in Montreal.
Q. That is exactly the point. Where there is an opening at Okotoks, in-
stead of a local man there developing it, it is developed by a man from Montreal.
That is the whole point of the banking situation.—A. I will put it the other way,
sir. If there were an industry in Okotoks which had a basis for credit and re-
quired to borrow money from the bank, it could borrow money from the banks
equally as well as if it were located in Montreal; if it were moved to Montreal
it could not have any better facilities for borrowing money.
Q. Do you think the recommendation of the bank manager at Okotoks for
a considerable loan would receive the same consideration at head office that
would be given a recommendation from the general manager of the principal
branch in Montreal who is in a position to walk into the office of the general
manager and state his case to him?—A. I think the same investigation would
be made and the same consideration given to it.
The Viczn-CHairMAN: Mr. Good, have you some questions to ask?
Mr. Goop: I think in view of the time; that Mr. Edwards will be back
another day, I will reserve my questions till later.
The Vicr-CHarrMAN: Very well. Now, Mr. Stevens.
By Hon. Mr. Stevens:
Q. I will try to be as brief as I can, in just a few pointed questions. Mr.
Edwards, you have had a good deal of experience in general auditing as well as
bank auditing, and in regard to the matter of the opportunity of shareholders
of a bank attending annual meetings; is there any difference between the posi-
tion of the shareholders of a bank and those of any other corporation in respect
to the attendance at annual meetings and participating in control is concerned.
—A. He has the same statutory privileges.
Sl
(Mr. George Edwards.]
60 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And the same general opportunity as the shareholder of any large cor-
poration?—A. I think so.
Q. In your experience as an auditor, the question of reports from branch
offices comes very prominently into this discussion, could you tell the com-
mittee if, in your experience, the reports of branch managers are in the main
and generally proven to be trustworthy and satisfactory—A. I think so. I think
in the mass they are satisfactory.
Q. Have you in mind any specific cases without necessarily naming them,
but in a general way any specific cases where larger losses have occurred to a
bank through false returns or faulty returns and reports from branch managers?
—A. I do not know of them. That is remote.
Q. Yes. That is outside principal offices—A. I do not know of them.
Q. I might put the next question in the form that is usually followed, that
is in the form of a statement, and ask you to agree with it, but I will not follow
a bad practice. Turning to clause 56, subsection 10, provides for reports. 1 will
not read the clause because it is unnecessary to do so. It provides that an auditor
shall report certain things to directors and so on, including loans exceeding 1 per
per cent and so on. If that report were made obligatory to the Minister of Finance
—I asked this question the other day and I do not think it was quite clearly
demonstrated—if this were made obligatory that these reports should be made
to the Minister of Finance as well as to the directors and the general manager,
do you think it would afford to the public increased protection?—A. I do, in
this way, that if the Minister was aware of the action of the auditors, he could
supplement that action by ascertaining and calling upon the auditors from time
to time to report to him as to what the directors had done in respect to these
matters to which their attention was called, and the whole tendency would be
good. It would tend to increase the confidence of the public by the knowledge
that these matters were being looked after in that way.
Q. Short of intentional and fraudulent action on the part of the directors
and general managers, in your opinion does the present Bank Act as renewed
last year offer to the depositors and the public a maximum of security and pro-
tection, short of deliberate fraud—A. I have already said that I think it could
be supplemented in that way, by a superimposed inspection.
Q. With that one addition?—A. With that one addition.
Q. Just a further question in regard to that. Having in mind the Govern-
ment inspection of head offices, if a bank directorate or management were desirous
of making questionable loans such as have proven in the past to bring about a
failure, or almost a failure; if they desired to make such loans in the face of
Government inspection, would it not be possible for them to make these loans
through the medium of some branch office not closely identified with the central
office, and thus escape the inspection, the Government inspection?—A. They
might escape direct inspection by the Government officer, but they would come
under the system of inspection followed by the bank and the procedure of the
banks, the inspection system would be a matter of scrutiny and inspection by the
Government auditor. I think the Government auditor would get it, but in
another way.
Q. Of the two sugestions, namely a direct inspection by the Government
examiners or the improvement or extension of clause 10 in the way of reports,
which do you consider would give the best protection to the public and to the
depositors?—A. I think the extension of the present system would afford by far
the best protection to the public of the two methods.
Q. That is in the matter of reports to the Minister, and strengthening clause
10 along the line suggested?—-A. Yes, keeping the Minister supplied with full
information, and enabling him to act, with an officer to act for him and to take
the initiative in some cases.
{Mr. George Edwards.]
BANKING AND COMMERCE 61
APPENDIX No. 1
Q. In regard to the question of note circulation, priority of claim, does not
the confidence of the public at large in our currency, largely bank currency of
course, depend upon the soundness of the security of the note, the bank note?—
‘Be nok GS,
Q. And the security behind the bank note at the present time is of a
character, generally speaking, to inspire that confidence?—A. Yes. I believe it
is stated that no note holders ever lost any money by the failure of a bank.
Q. Exactly. If, as suggested, this priority position of notes over bank assets
and so forth supported by the note redemption fund were changed, would it have
a tendency or would it not to lessen the public confidence in currency ?—
A. I think it would lessen the public confidence, yes.
By Mr. W. F. Maclean:
Q. In national currency?—A. No, bank currency.
Mr. Irvine: I did not quite get your question there; do you mean the
security or the confidence of the people of Canada depends on that which is
behind the bank notes themselves, or the bank loans. Which do you mean?
By Hon. Mr. Stevens:
Q. I am talking about the Canadian bank currency. I do not want to enter
into a discussion, but I will put the question again, and I am sure the witness
will answer it again. I asked: Does not the confidence in the country’s currency
in Canada—largely made up of bank notes—depend largely upon the soundness
of the security behind that circulation, that note circulation—A. Yes.
Q.: Now, I repeat my second question. If, as suggested, the priority claim of
the holder of the note upon the assets of the bank, plus the note redemption fund
which forms the security of our currency—if that is interfered with and that
priority position lessened or lowered, would it not have a tendency to disturb
public confidence in the country’s currency ?—A. In the bank’s currency, yes.
Q. Then I want to ask just one final question, which is what I was leading
up to. In your experience as an auditor of business generally, is it or is it not
one of the most necessary things for the successful carrying on of business that
a country should have a sound currency or a currency in which public confidence
is reposed?—A. Yes.
Q. And an interference with that confidence would have a serious effect
upon business generally?—A. Of course, if confidence were impaired in the bank
currency for that reason, the Government currency would take its place.
Q. Excuse me, you did not, I think, quite catch my point. I am not dis-
cussing the question at all of supplanting the present system at all, I am talking
about the present system of currency. I say if the public confidence were
disturbed in our bank currency, would it not have an adverse effect upon the
business of the country generally?—A. People who use currency could always
demand Dominion paper, Government paper, instead of the other, and probably
in the course of time the bank currency would disappear and Government
currency take its place.
Q. But if that process were introduced during that period of time where the
change you mention was being brought about, would it not have a harassing effect
on business generally ?—A. It might disturb business, yes; I think it would have
some disturbance, undoubtedly. I could not measure it, of course.
Q. I have just one more question. We were on this question of the currency,
and your last answer in regard to the possible change to Dominion notes. In
your opinion—again I appeal to you as an expert of wide experience in business
and in banking—has there come to your notice any valid reason why there should
be a change from the Canadian system of currency, bank currency and Dominion
notes as it is to-day?—A. Not from the public standpoint; certainly not. It is
serving its purpose.
1—173
{Mr. George Edwards.]
62 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And there seems to be no call for a change, from the standpoint of
public interest and public welfare?—-A. Not that I can see.
By Mr. Hughes:
Q. May I ask a question arising out of the question asked by Mr. Marler
and the answer of the witness. I think the question was, “ Are banks as willing
to make loans at branches as they are at the head office or at the chief office?”
and the answer was, ‘“ Yes.”’ Now, I would ask the witness if he knows that the
general instructions given to branch managers at ordinary branches are to the
effect that their business is to get deposits and not to make loans?—-A. I do not
know that.
Q. The witness, without knowing that, gave an answer to Mr. Marler to the
effect that the branches were as willing to make loans as the chief officer and
the head office. He said “ facilities”, but I do not know what “ facilities ”
means. The witness has said that he is not aware that the general policy that
branch managers, particularly at the smaller branches, are supposed to follow
under general instructions from head office, is that the money can be loaned only
once, the head office can take care of that itself, and the business of the smaller
branches is to get deposits?—A. I think I answered that, that I did not know it.
The Vick-CuHatrMAN: Gentlemen, have you any other questions to put to
Mr. Edwards? If so, we will request Mr. Edwards to be present at our next
sitting. When shall we meet again? I would suggest to the committee that as
there will be a division to-night, or probably in the small hours of the morning
it would hardly be possible for the committee to sit to-morrow morning. I
would therefore suggest to the committee that we sit on Tuesday next at 11
o’clock, if that is satisfactory.
Mr. McQuarriz: Could we not sit to-night?
The Vicz-CHatrMAN: I understand the Leader of the Opposition is not
yet through with his speech, and some hon. members would surely like to listen
to him, and also to the important speeches which will be delivered this afternoon
and this evening. It is pretty hard to say at what exact moment some hon.
members may be interested in the speech which is being delivered in the House,
particularly in the closing hours of the debate. I therefore would suggest that
we would be almost as well advanced to adjourn until Tuesday next at 11
o’clock.
Mr. SHaw: Why not meet at 2 o’clock? I understand that Sir William
Stavert is here. We might be able to finish with him between 2 and 3.
The Vice-Cuairman: I have no objection if it is stated that we sit only
until 3 o’clock.
Mr. Irvine: I move that this committee sit from 2 to 3 this afternoon, Mr.
Chairman.
The Vice-CHarrmMan: Will it be understood that our witness will be Sir
William Stavert, and Mr. Edwards will always be available? Then we will
adjourn till 2 o’clock this afternoon.
The witness retired.
The committee adjourned.
The Committee resumed at 2 p.m., Mr. Vien in the Chair.
The Vicr-CHaAIRMAN: Sir William Stavert, of Montreal, financier, is the
witness this afternoon.
Sir Winu1aM E. Sravert called.
The Vice-Cuairman: Sir William, I would like you to give to the com-
mittee your qualifications and experience so as to give the committee an idea of
the experience you have had in financial matters and in banking and commerce.
(Mr. George Edwards.]
BANKING AND COMMERCE . 63
APPENDIX No. 1
The Witness: As to my qualifications, Mr. Chairman, and gentlemen, it
is for you to judge; but I may state what my experiences have been. I com-
menced in the banking business very early in life, first in a bank controlled by
my father in Prince Edward Island; next in the Merchants Bank of Halifax,
now the Royal Bank of Canada; then in the Bank of Nova Scotia. Subsequently
I was general manager of the New Brunswick Bank of St. John, and after that I
joined the Bank of Montreal, from which I retired about 1912.
By Mr. W. F. Maclean:
Q. In what capacity, as manager?—A. My position then was superintendent
of branches. Subsequent to that, or during that time I had experience in the
winding up of banks. First, I wound up the Pictou Bank in 1888 or 1889.
While I was general manager of the bank of New Brunswick at St. John, the
bank of Yarmouth failed, and I was appointed curator and afterwards I was
elected by the shareholders and depositors as sole liquidator. Then, while in the
Bank of Montreal, I was called upon to perform some very responsible duties
in connection with the Ontario Bank of Toronto which failed in 1907. Sub-
sequent to winding up the Ontario Bank, I undertook similar responsibilities in
respect to the Sovereign Bank of Canada; the bank of St. Hyacinthe in the
Province of Quebec, the People’s Bank of New Brunswick at Fredericton, and
my father’s old bank the Summerside Bank. I think that covers the banks.
Subsequent to that, while still in the bank of Montreal I was made what is
similar to our curator of the United States Banking Company of Mexico City,
Mexico. As a matter of fact, I am still the liquidator of that bank, the process
being a slow one on account of the political conditions in Mexico.
By Mr. McMaster:
Q. So, Sir William, you have presided at the death bed or disposed of the
remains of many banks?—A. Yes.
Q. Could you give us an appreciation of what you think led to the disasters
which overtook those banks? Are you able to give us a general view of what
was wrong?—A. I am, yes.
The VicgE-CHAIRMAN: I may say, for the benefit of the committee that Sir
William has prepared a statement covering the whole subject, and I think it
would be advisable to allow Sir William to give that statement to the Com-
mittee.
Hon. Mr. Stevens: And question him afterwards.
The Vicn-CHaIRMAN: Yes.
The Witness: The statement of the Chairman is a correct reference to what
I have prepared. I have called it a memorandum or rather a review of past
conditions, with a recommendation covering what I think the Committee want to
get at. I will read it. (Reads):
Having had a rather extensive experience with banks which fell into evil
ways, I have found that in general the ordinary legitimate business in all cases
was fair to good, and would never have resulted in loss to depositors and that
the trouble in all cases was the result of one or a few irregularities involving
large amounts which had occurred in defiance of well-known principles in
banking. The irregularities were in most of cases recognized as such by the
managements which were responsible, but were the results largely of reasonably
conservative beginnings but insidious after growth and finally vain struggles at
recuperation. In all cases a man of experience charged with comprehensive
examination and bringing uninfluenced judgment to bear would have discovered
the weakness, and with the necessary authority could have cut the losses and
prevented disaster.
[Sir William E. Stavert.]
64 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
It may therefore be concluded that given skill and honesty, there is probably
no better system of bank inspection or examination than that practised by Can-
adian banks in the past. It is the Scotch and English system which has, with a
single startling exception, stood the test of generations with a gratifying degree
of satisfaction.
Additionnal safeguards which are provided for in the lately revised Bank
Act have no doubt improved conditions and if others can be discovered it would
be well to consider them with a view to their adoption.
In the minds of the public and of those who seek to provide safety for
depositors the system of ordinary inspection, as it has been practised for many
years by successful banks, does not received much consideration. Government
inspection or audit by public accountants is somewhat similarly regarded by the
banks, but I think it may be said that all systems have their advantages and
that the banks in Canada are at present enjoying those advaantages in com-
bined form.
What has happened in the recent past need not here be reviewed as the
events are fresh in the minds of all concerned. The object is to avoid a
repetition.
After giving the whole subject careful consideration in response to the
summons of this Committee, I am of the opinion that the presently improved
provisions of the Bank Act can be availed of to meet all requirements by a
comparatively simple modification which can be adopted forthwith and which
I have the honour of suggesting as follows:—
Let the Act be amended to provide for an organization over which will
preside a man of wide experience in Canadian banking and of approved judg-
ment, whose duty it will be to receive copies of reports in detail, including
details of branches near and remote, which will be made by the audit accountants
as presently provided for, to study and criticise conditions and methods of man-
agement as revealed by such reports, to check estimates of values of assets as
made by the accountants, to communicate his criticisms to the general managers
of the banks concerned in Board meetings assembled by correspondence, to
keep closely in touch with banks as a whole, and to personally visit the head
office of each bank as well as the larger branches at his discretion yearly, at
least, or preferably twice per year, for the purpose of looking into conditions
at close range and discussing the various aspects of the situations as they exist
and are revealed and generally to do such things as are in his opinion necessary
to determine the actual position as far as possible.
My experience enables me to state that the right kind of man would very
soon discover irregular methods and would discuss them with the management.
His service would not be so much in the nature of a secondary inspection,
or examination of the efficient and economical functioning of the bank which he
would be visiting as in a comprehensive view. That would be for the inspector
of the bank, the management generally and for the accountants acting for the
shareholders. The principal roll of the man I have in mind would be to view
the situation comprehensively in the light of the information he would be able
to obtain from studying the reports of the accountant auditors, the reports of the
inspectors of the bank, the credit information files and the current operating of
the principle accounts at head office and branches. He should have the
authority now enjoyed by the accountant auditors and the Minister of Finance
under Articles 56 and 112 of the Act, to call for such information as he might
require from time to time, and he would know what he should have and fall
for it.
It would be the duty of such a man to report to the Minister of Finance and
in the event of difficulties arising to make recommendations to the Minister and
{Sir William E. Stavert.]
BANKING AND COMMERCE 65
APPENDIX No. 1
failing, the taking of such action as might be recommended to consult with a
small Committee of the Bankers Association to be appointed for the purpose,
and to act without prejudice or responsibility.
Such a system might not prevent bankruptcy where the mistakes had been
made previous to the adoption of the system or might have been made in
defiance of the safeguards provided, but would have a very wholesome influence
on those who might be tempted to go wrong, and would have the effect of
preventing questionable practices or methods or of checking them in the bud.
It would also prevent and determine that struggle which so often takes place
when too late to restore conditions, and which usually ends in confusion worse
confounded as in the recent cases we know of.
Such a position should command a liberal salary and the appointment should
be strictly non-political. I suggest that the appointment should be by the
Supreme Court of Canada, or the Chief Justice, or other judicial authority in
the absence of the Chief Justice, and I think that the amendment in providing
for such appointment should also provide that the Chief Justice would be
expected to hear representatives, say presidents or general managers, of the
principal banks, on the subject of the capacity and ability of nominees or
applicants for such appointment. The amendment should further provide that
it would be the duty of such representatives of banks to supply the information
so far as they might be able to on being called upon, and that their act in so
doing would be without prejudice or responsibility to themselves or the banks
they represent.
The expenses of the organization, including the salary of the presiding officer,
might be borne by the banks in the proportions of the assets of each, as shown by
their statements.
It may be objected by some that the plan would attach responsibility to
the Government in the event of a disastrous failure. The answer to such an
objection is that the Government has always had a certain responsibility, if
only moral, because of providing a Bank Act and for certain returns and super-
vision, which responsibility was somewhat increased at the time of passing the
present Act. The further increase of responsibility under this plan is very small,
especially when the safeguards are considered, but what is the responsibility at
most? It is held that there is no legal responsibility and the amendment could
emphasize that. It may also be observed that in the United States active and
dominating examination of banks is carried on by the Government and no
question of financial responsibility has ever arisen.
The amendment should also provide that the personnel of the organization
will hold office at the pleasure of the Court or Chief Justice.
Such assistants as the presiding officer of the organization might require
should be of his own selection, and salaries should be on the scale of salaries
paid by banks for similar duties.
It should be understood that the organization would be conducted economi-
cally by avoiding detail in routine, depending upon the staffs of the different
banks and the audit accountants for such detail as might be necessary. In
other words, the organization should be conducted as if it were a section of
the Finance Department, which after a manner it would be.
By Mr. Shaw:
Q. Have you examined the amendment proposed last year by Mr. Woods-
worth, the Member for Central Winnipeg, dealing with this very matter?—A. No.
Q. He presented to this Committee and subsequently to Parliament an
amendment which is substantially on all fours with the proposition which you
now make. You have not had occasion to examine that?—A. No.
{Sir William E. Stavert.]
66 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. With regard to your suggestion: You suggest that the expenses of this
work should be borne by the bank?—A. Yes.
Q. Is the object of this organization to protect the public or protect the
bank?—A. The public.
Q. And why should not the public pay for their protection?—A. That is a
detail.
Q. But is it not rather important?—A. No, sir.
Q. If you have men paid by the Government they are responsible to the
Government; if paid by the bank, the question might be different—A. Perhaps
so.
Q. They are under a misapprehension as to where the responsibility lies.
So you would not object to the payment of such an organization by the Gov-
ernment?—A. No.
Q. And now you suggest that there is no responsibility on the Government
in the event of inspection?—A. Yes.
Q. Is there any responsibility on the Government in the event of its failure
to make any inspection?—A. There might be.
Q. So that you would agree with what Mr. Edwards said this morning
that this failure to take every safeguard including the inspection would invite
responsibility on the Government?—A. Yes.
Q. And it is not, on the other hand, that inspection invites responsibility ?—
A. No—exactly.
Q. Now, if you decide on this plan which you have suggested, Sir William.
have you gone into any other matters that would assist in protecting depositors?
—A. No, I cannot say I have.
Q. Are you familiar with the Reserve or National Bank System?—A. By
repute.
Q. Have you made any investigation of it?—A. No.
Q. So that I take it that on that field you would not feel that you were
speaking with the same authority as you do in connection with the Canada Bank
Act with which you are more intimately associated?—=A. Exactly.
Q. It was suggested, Sir William, that there never had been any losses to
note-holders in this country. Do you know, as a matter of fact, whether that is
so?—A. I do not know of any losses ever having occurred to note-holders in
recent years.
Q. There were some, I believe, before this section of the Bank Act dealing
with the security of the notes was provided?—A. Previous to the formation—-
By Hon. Mr. Stevens:
Q. How long ago?
Mr. SuHaw: I am speaking only from recollection.
Q. Do you know, Sir William?—A. The Bank of Liverpool and the Bank
of Acadia——
By the Vice-Chairman:
Q. No, how long ago, Sir William?
By Mr. Shaw:
Q. Since losses were suffered by note-holders?—A. It must be fifty-five
years.
Q. In any event, Sir William, it would be before the inauguration of the
present system?—A. Yes, sir.
Q. With regard to that, the question of the priorities—were you in the room
this morning?—A. Yes, sir.
[Sir William E. Stavert.)
BANKING AND COMMERCE 67
APPENDIX No. 1
Q. You are familiar, of course, with priorities, that is, the note-holders
having the first priority, and then the Dominion Government, and the provincial
government, and you will realize, of course, if you remove these priorities, any
one of these, you will safeguard the depositors to that extent?—A. To the extent
that a failed bank might have money of the governments.
Q. Money of the provincial government?—A. Yes.
Q. I am not suggesting that the securties, so far as the notes are concerned,
should be removed. I think that should be maintained, but I want to ask you
this question: What objection would there be to using the circulation redemp-
tion fund in satisfaction of the outstanding notes of an insolvent bank first,
and then letting the circulation redemption fund be increased up to the proper
standard by the banks, subsequently ?—A. Well, that is provided for in the Act.
Q. No. Let me point this out, Sir William. Here is what happens. The
circulation redemption fund now stands at something over six million dollars.
In the event of an insolvent bank—take the Home Bank for instance—the first
claim upon the assets of that bank is the lien of the note-holders, and they
must be paid in full from the assets of the bank. If the assets of the bank are
not sufficient for that purpose then they go on this circulation redemption fund,
but they do not go on to it if there are sufficient assets to satisfy the note-
holders. Do you see the significance of my remarks?—A. Not quite.
Q. Well, let me put it again. The circulation redemption fund now stands
at the sum of six million dollars. We will say the Home Bank had outstanding
at the time of its insolvency two million dollars’ worth of notes. These note-
holders do not share in that circulation redemption fund. They come on to the
assets first-——
Mr. Goop: Including the depositors’ money.
Mr. Suaw: Including the depositors’ money.
A) and it is only in the event that the assets of the bank are not suffi-
cient to meet the notes, that the note-holders fall back upon the circulation
redemption fund. That is correct?—A. Yes.
Q. What objection would you have or would you raise to a proposition to
have the note-holders fall first upon the circulation redemption fund instead of
on the assets of the insolvent bank as at the present time?—A. I do not know
that I would have any objection to that.
By Mr. Marler:
Q. You understand that, Sir William, perfectly clearly? It means that the
money put in by all of the banks would be called upon first?-—-A. Subject to
recuperation by the banks.
Mr. Maruer: That is the way the question was put. I would like to have
that made perfectly clear to the Committee. However, I may be misquoting it.
Mr. SuHaw: No, I think you are right. I too want that made clear to Sir
William.
Mr. Marter: I believe what Mr. Shaw is trying to bring out is this: he
says that the notes of a failed bank should run against the circulation retirement
fund. Of course, as you are well aware, in the circulation retirement fund there
are contributions by many banks, and it may mean that the notes of a bank—
in this instance, the Home Bank—would be far more than what the Home Bank
has contributed to that fund. It seems, therefore, that the contributions of the
other banks would be taken for the purpose of paying the notes of the Home
ank.
Mr. SuHaw: That is right.
The Wirness I misunderstood Mr. Shaw’s question.
[Sir William E. Stavert.]
68 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Marter: If I might add to that; there will be no recourse for the
banks which have contributed to get back anything.
By Mr. Shaw:
Q. If the circulation retirement fund were to share pro rata with the other
creditors—you would not agree with that?—A. No.
Q. You think the present situation is satisfactory whereby the circulation
retirement fund is only to be called upon in the event that there are not suffi-
cient assets of the bank, including the depositors’ money, to pay the notes?—A.
Certainly.
By Mr. Irvine:
Q. What would be the object then of a fund of this character? Might not
the Home Bank, which I think secured $100,000 from this fund, have as weil
put that into a rest fund by itself? Why have a fund at all if it is not to create
the idea that the whole fund is behind any bank that fails?
By Mr. Shaw:
Q. I think we understand each other thoroughly, Sir William. Do you
not see if the scheme I suggested were in force that every bank would be
vitally interested in the welfare of every other bank?—-A. They are now.
Q. But not financially?—A. Yes.
Q. Excepting insofar as the failure may affect public confidence?—A. And
so far as the assets of a failed bank may not be able to retire its circulation.
Q. But no case of that kind has happened?—A. No.
Q. But the Home Bank indebtedness in that respect being only two mil-
lion dollars at most, and the circulation retirement fund being six million, the
facilities there are ample to cover all the notes?—A. Yet the other banks are
interested.
Q. But that is a remote contingency?—A. Yes.
Q. If we had something like that do you not agree that each bank would
feel it was very vitally financially interested in every other bank?—A. They
are now.
Q. Would it increase the interest?—A. It is a question of degree.
Q. Would it increase the interest?—A. I do not know that it would increase
the interest.
Q. With regard to the priority given Dominion and provincial govern-
ments, are you prepared to eliminate these priorities and let these governments
stand on exactly the same basis as ordinary creditors?
Mr. Maciran: Taking their own chances under their own laws.
The Witness: Personally I should not urge any objection.
By Mr. Shaw:
Q. You see the Dominion Government has opportunity now to secure from
all the banks all the returns, and it is in the best position to judge as to
where to put its funds?—A. At the time.
Q. It is in a much better position than the ordinary depositors, is it not?
—A. I do not know as it is. The statements of the banks go to the public as
well as as to the Government.
Q. But the Government has the power to call for certain returns which
never become public?—A. Yes.
4 :2 So there is no reason why they should be given a preferred position?
—A. No.
Q. If anything, their position should be lower than the common depositors’
because they have the information within their power, or have the opportunity
[Sir William E. Stavert.]
BANKING AND COMMERCE 69
APPENDIX No. 1
of getting it which is not given to the ordinary depositors?—A. That is a
technical thing, there.
Q. I take it, then, you would have no objection to the elimination of these
priorities? —A. Not personally.
Mr. Macrtean: And therefore the giving of these priorities is damaging
to the depositors who supply most of the money to the banks.
By Hon. Mr. Stevens:
Q. In this suggested scheme, Sir William, this ehicets whom we will call a
supervisor, although no name was given for him—could such supervisor secure
safe, sufficient and reliable information from the banks in their statements
by the method suggested by you, added to which would be a check on some of
the leading branches without what we might call physical examination?—A.
I believe so.
Q. In your experience in the banking business, generally speaking, are
the returns from branch banks to the head offices weekly, daily or monthly as
the case may be, in the main thoroughly reliable?—A. Yes.
Hon. Mr. Stevens: I asked that question of Mr. Edwards this morning
and I think it is absolutely vital to such a scheme as you have here to deter-
mine this point.
Q. Is the proportion of their reliability such as to warrant you in saying
that the risk is so small as to be almost negligible?—A. I believe so.
By Mr. McMaster:
Q. Sir William, you suggested a method of appointment of this super-
visor which was somewhat unusual. You suggested it should be made by the
Chief Justice of the Supreme ‘Court. Would you tell us why you arrived at
that conclusion?—A. I was led to that conclusion largely by reason of recent
events.
Q. That is not clear to me yet. Speak with the utmost frankness, sir. You
are among friends——A. While I did not say it, it is said that in a recent case
there was in effect Government inspection but no action was taken. Beside
that, if the appointment is purely non-political the public would have an
opportunity of getting a better selection than if it were political.
Q. Now, just let me follow this a little further. Suppose the Chief Justice
appointed someone who was not competent, and who was proven to be incom-
petent, what would you do?—A. I would take steps to have him dismissed.
Q. Dismiss the Chief Justice for having appointed a bad man, or have the
bad man dismissed?—-A. Have the bad man dismissed.
By Mr. W. F. Maclean:
Q. Might I ask this question? What is your objection to the Government
inspection that they have now in the United States, or do you think that this
is a better system than they have there?—A. I think this is a better system.
Q. Has that system failed in the United States, up to date?—A. I cannot
say that it has.
By Mr. Good:
Q. Just in continuation of this question of the appointment, I would like
to know what Sir William thinks about the proposition as suggested, that such
a supervisor should be appointed as the Auditor General is appointed, remov-
able only by Parliament? Let him be appointed by Parliament and removable
by Parliament.
Hon. Mr. Stevens: The Auditor General is not appointed by Parliament;
it is a straight political appointment.
{Sir William E. Stavert.]
70 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Goon: Is there any possibility of getting an appointment by Parlia-
ment that is not political?
The Wirness: My answer is the same; I think we would have a better
selection, because the selection would be made by men who know the capacity
and ability of the applicant or nominee.
By Mr. McMaster:
Q. Sir William, we have had in the past 25 years in Canada, as Finance
Ministers, Hon. William Fielding, Sir Thomas White, Sir Henry Drayton, Hon.
A. K. MacLean, and the present acting Minister of Finance, Mr. J. A. Robb.
Is it your considered belief that the Chief Justices of the Supreme Court during
that 25 years were better judges as to the qualifications and requirements of
such a supervisor as you suggest than any one of these gentlemen?—A. If his
principal advisers were general managers or presidents of banks, for an appoint-
ment of this kind.
Q. Under your plan, this appointment is to be made by the Chief Justice
of the Supreme Court, but he is really to be the mouthpiece of the presidents
and managers of banks, who advise him? He is to be guided by them?—A. As
I have stated in the plan, after hearing general managers and presidents of
banks.
By Mr. W. F. Maclean:
Q. But without hearing the public that we claim to represent here.—A.
You may add that if you like.
By Mr. Irvine:
Q. May I ask if it was your motive in making that suggestion that while
the bank system is practically a corporation, it would be better to keep it sepa-
rate from Government interference? Would that be your motive?—A. No.
Q. Would you think, then, it was the inefficiency of governments generally
that you were trying to get away from?—A. No, it is purely as I said, I think
we would have a better selection by the method I have suggested.
Q. Would you lend your support to this suggestion, that following out your
organization there, and instead of having one man appointed by a Judge, how
would it be to have a group of men, one appointed by the Bankers’ Association,
one appointed by the manufacturers and business men generally, and say the
Finance Minister? Would that meet with your approval, to have say three or
four men put on that committee or board to do this work?—A. I would not
urge any objection, but I think my plan would result in a better appointment.
Q. Your plan leaves only the one, where in the other case you have three
or four chances of getting a good man.—A. But you have several general man-
agers and presidents of banks.
By Mr. McMaster:
Q. What you are afraid of is that political partisanship might bring about
a poor appointment, and you are trying to get away from that?—A. I would
not put it that way; I would put it as I did before. We would get a better
selection.
By Mr. Hughes:
Q. Sir William, the suggestion you have made, would it not really resolve
itself into this; would I be correct in saying that the Chief Justice, a man
learned in the law and an experienced man in his own business and experienced
generally, who would have not very many qualifications to enable him to
appoint a man of that description personally, but you suggest that he would be
[Sir William E. Stavert.]
BANKING AND COMMERCE 71
APPENDIX No. 1
advised in the appointment by the presidents and managers of the leading
banks in Canada? In 9 cases out of 10, and perhaps in 99 out of 100, would he
not accept that advice in making the appointment?—A. I think he would accept
that advice.
Q. And in reality, therefore, the appointment would be made by the presi.
dents and managers of the leading banks that is what it would really amount to,
though confirmed or ostensibly named by the Chief Justice of the Supreme
Court.—A. It would have that effect, subject to the judgment of the Chief
Justice.
Q. Well, I think myself, if you will permit an expression of opinion, that
it would be a better method of selection than an appointment by the publie
or by the Government or by Parliament.—A. Thank you.
Q. Then there is a suggestion made, or rather a suggestion has been made—
in fact there is a resolution before the House of Commons—that the depositors
in the banks be safeguarded; that the smaller depositors in the banks, say up to
$3,000 be safeguarded by the creation of a fund similar to the Redemption
Fund with regard to the notes in circulation now.
Mr. McMaster: I hardly think that is quite fair to Mr. Ladner, when he
thought the matter was not going to come up.
Mr. Hucues: Very well, I will not continue any further with that. I just
thought it would be a good time to get the experience of the present witness on
that subject.
By Mr. W. F. Maclean:
Q. Would you limit it to one name being submitted to the Chief Justice,
or any number?—A. Any number, of course.
Mr. Marter: Is it permitted to ask the witness a question that may not
be strictly germane to the question of bank inspection?
The Vicr-CHatRMAN: Yes, I think so.
By Mr. Marler:
Q. I simply want to ask one question, a question which I brought up this
morning as regards the facilities given in country branches, or branches outside
head office branches—I think Sir William and the committee will understand
very well what I mean. Are the facilities of banks equally at the disposal of
the branches I first referred to, as they are at the disposal of the branches I have
secondly referred to?—A. Quite.
Q. In other words, branch bank managers have equal facilities of the bank
funds towards their customers as managers of the larger branches in the large
centres?—A. Yes.
By Mr. Spencer:
Q. Following up the question that Mr. Marler asked you, I would like to
know if you are aware of this fact, that when clients of our various branch banks
have asked for certain lines of credit, although they are admitted to be good
safe clients, they have been turned down for the simple reason that instructions
have been given from headquarters that no more credit must be given out to
certain particular branches?—A. I have heard of such excuses having been
given, but I have always found in cases where they have been given that it was
a flight of the manager’s imagination.
Q. I know for a fact that the statement has been made by managers?—A.
Quite so.
Q. While I am on my feet I would like to ask another question. You made
the statement a few moments ago that you considered that the inspection of the
{Sir William E. Stavert.]
72 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Canadian banks was a better system than the inspection in the United States.
Would you mind giving the committee the reasons for that? Or am I stating it
correctly ?—A. I did not say that. What I said was that our system of inspec-
tion as has been practised for many years, which is the Scotch and English
system, was giving gratifying satisfaction. I did not compare it with the system
in the United States.
Mr. Spencer: I beg your pardon, I thought you did.
By Mr. Good:
a fee You mean the system now followed by the banks with their branches —
Paves.
By Mr. McTaggart:
Q. There was a question suggested to my mind in relation to the branch
banks, and I would like to know for information only if the loans at branch
banks must bear a relationship or be in a certain proportion to the deposits at
the branch bank?—A. Not at all.
Q. There is no relationship?—A. No.
By Mr. W. F. Maclean:
Q. Is it your opinion that small banks can do no more for their respective
localities than the branches of large banks with head offices some distance away,
or is there not room in this country, notwithstanding our past experience, for
the development of smaller banks intimate with their locality and its require-
ments?—-A. My experience has been that branch banks in localities where there
are small banks have the most desirable business of the locality, one reason
being that the customer’s affairs in the case of the branch bank are known only
to the manager, while in the other, they are known to a Board of Directors.
By Mr. McMaster:
Q. Do you regard that as a disadvantage?—A. I am simply stating what 1
have observed.
By Mr. Irvine:
Q. Have you had experience with a small bank which was not a branch
bank?—A. Yes.
By Mr. Garland:
Q. Just one question. Is it not true in Canada that the smaller branch
bank managers have a discretionary loan limit which is considerably less than
the loaning limit, say at larger branches in cities, or in the central branches?—
A. The authority does vary, but very little.
Q. I am afraid I must disagree, out of my own knowledge. For example.
if you can give the committee the discretionary limit of the branch bank of the
Bank of Montreal in Toronto, I can give you the discretionary limit of the
branch bank of Montreal in my town, and I think we will find a very consid-
erable disparity. Therefore, the facilities are not alike.
By Mr. Marler:
Q. Before you answer that question may I say a word? It may be true,
and I admit it is true that a branch manager has not got the power to make a
loan, so to speak, on his own authority, but that self-same manager has com-
mand of all the funds at that bank for making a proper loan on referring the
matter to his head office. Am I not right there?—A. Yes.
Gir William E. Stavert.]
BANKING AND COMMERCE 73
APPENDIX No. 1
By Mr. Garland:
Q. Just following that up also, may I suggest that Mr. Marler’s point is
hardly well taken. You see, a local or rural branch of the Bank of Montreal
has a certain small discretionary loaning limit, we will say, in some cases—last
year as a matter of fact it was around $500.00. Over that, application had to
be made to the office in Calgary, but in the event of the loan being over $10,000
to $15,000 or $20,000. I am not sure of the amount, the Calgary office had to
refer the question to the head office, so there was really a whole series of steps.
In short, the facilities did not exist equally as between the bank in Toronto or
Montreal and the branch say in Rumsey. Is that not true?—A. The facilities
as they exist are better where the electric wire can be availed of. The loan of a
very large amount can be arranged within 24 hours by electric wire. In the
case, for instance, of a smaller bank, you have to wait for a meeting of the
Board of Directors perhaps once or twice a week. If you want comparisons,
there is one that I can give you in my experience.
By Mr. W. F. Maclean:
Q. May I ask one more question? You see no objection to bank mergers?
Mr. McMaster: He did not say so.
Mr. Macuran: I have drawn that conclusion from his statement so far,
that bank mergers are good for this country.
Mr. Marter: This is a new subject.
Mr. Maciran: Yes, I know it is.
The Vice-CHArrMAN: What is your question?
By Mr. Maclean:
Q. I was asking Sir William-—I will put it this way, whether he thinks there
should not be a limitation to bank mergers in this country?
The Vick-CHairMAN: I do not believe there is any objection to that ques-
tion.
The Wirness: Bank mergers cannot be effected excepting by the consent
of the Minister of Finance. There are objections to them in the minds of the
public, while among financiers there are reasons why they should take place,
as they have done in England where to-day with a population of over forty mil-
lions there are only five banks.
By Mr. Ward:
Q. I think if there is one question that has been dealt with by this com-
mittee that is more interesting and more important than another, it is the very
question just under consideration, and that is a comparison between the facili-
ties afforded by the little branch bank out in the rural district, or out in the
little town, and those afforded in the cities. In spite of the remarks of Mr.
Marler and Mr. Edwards, and the witness before us, I can give a concrete
example which may be of interest to the committee. Just a short time ago a
man in my own town, operating a little manufacturing business—
The Vice-CHAaIRMAN: I want to draw your attention to the fact that we
have Sir William Stavert for just a few moments. If you have a question to put
to him, very well, but it would be losing his time and the time of the committee
to enter into this matter which may be discussed at a later date.
Mr. Warp: If you had allowed me to go on I would have been through by
now.
The Vice-CuHaiRMAN: Very well, go ahead.
(Sir William E. Stavert.]
74 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Warp: This man spent three months of his good time in an endeavour
to get a loan from the local manager in his home town. He was finally forced
to buy a ticket to the city of Montreal, and he had his line of credit increased
by exactly 100 per cent by appearing at the head office in the city of Montreal.
I could give three or four more cases that occurred in my own town. I think the
statements are unfair and leave an impression before this committee that there
is not a disparity between the facilities in the country and those in the city.
The Vicr-CHairMAN: Gentlemen, any other questions to be asked?
By Mr. Coote:
Q. Just one question. I think Sir William said it should be stated plainly
in the Act that the Government assumes no responsibility for depositors. I
would like to ask him if he would have any objection to an amendment to the
Bank Act providing that every branch bank should display such a sign at each
of its offices where it is receiving deposits, that the Government assume no respon-
sibility whatever for the deposits in those banks?—A. I cannot answer that
question. :
By Mr. Hughes:
Q. Sir William, is not the chief object of the larger banks in opening ordin-
ary branches in the smaller places to get deposits rather than to make loans?—
A. No.
The Vicze-CHariRMAN: Our time is now exhausted, and we must adjourn.
I am sure I am voicing the sentiments of the Committee in thanking Sir William
Stavert for the valuable information he has given to the Committee. Now,
gentlemen, we will meet again on Tuesday at 11 o’clock.
Witness retired.
The Committee adjourned.
ComMITTEE Room 429,
House or ComMMoNsS,
Turspay, May 20, 1924.
The Select Standing Committee on Banking and Commerce met at 11
o’clock a.m.
The Secretary: On Thursday, the 15th of May, his honour the Speaker
read to the House the resignation of Hon. Walter G. Mitchell as a member of the
House. Mr. Mitchell was Chairman of this Committee, and it is now my duty
to ask the members of this Committee to select a new Chairman.
Mr. Hucues: Mr. Vien has been acting-chairman for some time, I think
with general satisfaction, and I would therefore move that he be elected Chair-
man of this Committee.
Mr. Spencer: I second that.
The Secretary: Any other nominations? If not, I declare Mr. Vien
elected and ask him to take the Chair.
Mr. Vien having taken the Chair.
The CuatrMaNn: I beg to thank you very cordially for this honour and
mark of confidence. J know too well my shortcomings and limitations to think
that any merit of mine has brought me this honour. But as a member of the
[Sir William E. Stavert.]
BANKING AND COMMERCE 75
APPENDIX No. 1 ~ © :
Committee on Banking and Commerce, particularly since 1921, my associations
with the members of the Committee have been so pleasant, and I have been
able to realize and to have such faith in the sincerity of purpose of all hon.
members of the Committee, that I shall bank on their hearty co-operation. I
accept the honour and will endeavor to discharge the duties of my office to the
best of my ability. I can only hope that I shall be able to live up to your
expectations.
Gentlemen, I must communicate to the Committee a letter from the Speaker
of the House of Commons to the Editor of Debates and Chief of the Reporting
Branch of the House of Commons. This letter relates to the rules in respect
to the reporting and printing of proceedings of Committees. It will be printed
in our record, and I think it will save time to have it printed in our proceedings
so that hon. members will be able to take cognizance of it in to-morrow’s report.
(See page exlix.)
“Notices of motion ” called.
Mr. W. F. Mactzean: Will you please announce the programme in regard
to witnesses?
The CuatrMan: I shall do that in a minute. I have a notice of motion
from Mr. Spencer which reads as follows:—
“That the Bank Act be amended to provide that the moneys in
the Circulation Fund shall first be applied to the payment of the notes
of a bank which has suspended payment and that the other assets of the
bank be not applied to the payment of such notes until the moneys in the
said Fund are first exhausted.”
Any other notices of motion?
Gentlemen, we have the pleasure of having with us this morning Mr. John
W. Pole, Chief National Bank Examiner of the Department of the Treasury at
Washington. Mr. Pole has been kind enough to come and give evidence on the
system of bank inspection as it now exists in the United States. He will be our
first witness. Then we shall have the pleasure of hearing Mr. Skelton Williams
on Thursday next. Mr. Pole is at our disposal for to-day and to-morrow.
Hon. Mr. Stevens: May I suggest, Mr. Chairman, that in our proceedings
with Mr. Pole, we should permit him to make his complete statement before
asking questions; otherwise, I am afraid that owing to the tendency of Com-
mittees of this kind to ply witnesses with questions we might lose some of the
value of his statement. After he is through, I presume he would have no
objection to answering questions from members of the Committee.
The Cuatrman: I think Mr. Stevens’ suggestion is very good indeed. It
is along the lines of our rules of procedure as determined at the opening of our
sittings that the witness be allowed to make his statement and then hon. members
who wish to put questions can do so.
_ Mr. W. F. Mactean: How long may we expect to have this witness here?
The CuatrmMan: To-day and to-morrow. Meantime, Mr. Edwards’ evidence
ant be suspended so as not to delay the two gentlemen who come from the United
tates.
Mr. Hucues: Should there be any limit to the time that one member
occupies in examining the witness?
Mr. McMaster: We must leave that to the discretion of the Chairman.
He will rule wisely and justly.
The Cuatrman: I think it would be unfair to put any limit on hon. mem-
bers. Some members are more interested in putting questions than CHa: As
1—18 :
76 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
I said a moment ago, we all have faith in the sincerity of purpose of every hon.
member of the Committee. They are desirous of discharging the duties of their
office and are trying to live up to the expectations of Parliament. Parliament
has referred to us the question of suggesting whatever amendments to the Bank
Act are in our opinion advisable, with a view to remedying the situation which
has been examplified in the case of the Home Bank, and with a view to trying
to give a greater degree of safety to depositors and prevent a recurrence of that
unfortunate incident.
Mr. W. F. Macuean: Along the line of what you are saying, Mr. Chair-
man, I would suggest that if witnesses are limited in time, as this witness is,
members might make their questions short.
The Cuairman: I think that will appeal to hon. members.
Mr. J. W. Poe called.
The Cuarrman: Mr. Pole, may I ask you to give to the Committee a short
history of your life and practice in connection with banking so as to qualify
you as a witness?
Witness: I was born in England and lived there for twenty-three years, so
that I may say, gentlemen, that I feel very much at home under the Union
Jack. I came to the Umted States in 1893, and after practicing for a short
time the profession of civil engineering, I later got into the banking business in
Kentucky, and afterwards in Alabama, where I was associated with quite a
number of banks. In 1915 I was appointed National Bank Examiner. From
that date, after moving to various parts of the United States and conducting
examinations of banks, I was for five years Chief National Bank Examiner,
which position I shall explain to you a little later, of the sixth Federal District,
which carried me up to last year when I was appointed Chief Nationa] Bank
Examiner of the United States, with offices in Washington in the Treasury
Building.
The CuHatrMAN: Mr. Pole, the order of reference to this Committee from
the House is to the effect of suggesting such amendment to the Bank Act as
would prevent a recurrence of the sad incidents of the Home Bank failure, in
connection with which the depositors run a risk of losing their deposits. The
Committee is anxious to hear you on the question of bank inspection, and par-
ticularly in regard to the system which prevails in the United States, with a
view to seeing whether we cannot improve on our system of bank inspection by
adopting some of the methods that you have in force in your country. There-
fore, we would like you to make a general statement to the Committee as to the
system which prevails in the United States, and, if you are in a position to do
so, to compare it with that in existence in Canada.
Wirness: Mr. Chairman, and gentlemen, when I received your telegram,
Mr. Chairman, I was rather at sea and have been, in fact, until you spoke a
few moments ago, as to what precisely the purpose of this mission was. I
understood in a general way that it had something to do with examinations, but
at that time, I was not familiar with your system of examinations; in fact, I
did not know you had any; what we term an examination. I thought that yours
was merely an audit which the banks were required to submit, I think, to the
Minister of Finance.
Mr. W. F. Mactean: So it is.
Witness: Now, in the United States we have, as you gentlemen are well
aware,—a dual system of banking. There are the State Banks which are oper-
ated under State laws and which are examined by the Banking Departments
of each State. There are 48 States, 48 different systems, and 48 different char-
[Mr. John W. Pole.]
BANKING AND COMMERCE 77
APPENDIX No. 1
acters of banking, as we might call it; and as many different laws and systems
of examinations. It is generally conceded that in some instances the State
Bank examinations are rather loose, and I think that may be perhaps demon-
strated by the fact that the percentage of State bank failures is greatly in excess
of the National Bank failures. The Comptroller of the currency is in charge
of the banks and bank examinations for the Government, and it has been the
effort of succeeding Comptrollers to improve the character of examinations
and use every effort to make the banks safer places for the deposit of funds,
for creditors as well as for shareholders.
During the regime of Mr. John Skelton Williams, whom I understand is to
appear before you, there was a radical change in the examinations. They were
stiffened up considerably and very much improved.
By Mr. Hughes:
Q. Examination of State Banks and National Banks?—A. These are
National Banks. But during Mr. Dawes’ regime, the examinations are perhaps
even more technical and very practical. Now, this is necessarily, Mr. Chairman,
a fragmentary sort of a statement, because I am thinking about it as I go along.
The forces of examiners in the United States consist of about two hundred and
fifty examiners, and about two hundred and fifty assistants, with twelve chief
examiners. The territory is divided into twelve Federal Reserve districts, there
being a chief examiner in charge of the banks within the confines of each dis-
trict. The law requires that examinations of banks shall be made twice yearly,
but the Comptroller of the Currency has power to make as many examinations
of any bank as he deems advisable, and it is not infrequently that examina-
tions are made as often as every sixty days, in instances where banks have
become over-extended or are in an otherwise unsatisfactory condition.
By Mr. Maclean:
Q. Any notice given of an examination?—A. There is no notice given, Mr.
Maclean, of these examinations. In fact, they are made at irregular intervals,
so that the banks may not be on notice when the examinations are to be made.
Q. Does this all refer to National Banks?—A..It all refers to National
Banks. The duties of the Chief Examiner are to superintend the work of
examination in his particular Federal Reserve district. His examiners, who are
working under him, and his force of assistants make these examinations and
their reports are sent to the chief examiner’s office in the Federal Reserve dis-
trict where they are typed and forwarded to Washington; one copy of the
examination goes to the bank, one to the examiner for reference at the next
succeeding examination, one is retained in his office, and one is sent to the
Federal Reserve Bank of the district. After that report of the examination
gets to Washington it is analyzed by men of wide experience who have been
drawn from various sections of the country in which the banks are located, and
are known as “ Assistant Chief National Bank Examiners.’”’ They are execu-
tives and men of wide banking experience, being selected particularly for the
qualities which enable them to make an analysis report and conduct corres-
pondence with the banks with a view to correcting any unsatisfactory condi-
tions which may have been found at the examinations. The kind of examina-
tions which have been adopted are in the form of interrogatories, and I should
be glad to leave a copy of these forms with the Committee together with any
other data which may be of interest.
Q. How many pages does that make?—A. It makes about twelve pages,
Mr. Maclean, and when completed is a very comprehensive analysis of the
bank. The examiner will go into a bank at an unexpected time, with his assist-
ants. In a large bank like the National City Bank of New York, using this
{[Mr. John W. Pole.]
1—184
78 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
as illustration, the examiner in charge goes in with perhaps three assistant
examiners and fifty assistants; while in the smaller banks one examiner with
one assistant will handle the proposition. With the exception that no loans
are verified with the makers and no deposits are verified, an audit is made.
In addition to this, and this is regarded as even more important especially as
the larger banks maintain an auditing department of their own, the bank’s
assets are carefully analyzed and a report is made specifying these assets as
“slow”, “doubtful”, or “losses”, as the case may be. Would it be of interest
to the Committee if I gave the character of some of these questions which are
asked in the course of examination?
Form filed as EXHIBIT No. 1 (Not printed).
The CuarrMan: I think that would be a good plan.
The Wrrness: That would give a very good idea of the general scope of
the examination. On the first page we have the bank’s statement, that is,
Exhibit No. 1, examiner’s report of the condition of the bank. It gives the
name of the president and the cashier, and it gives the bank’s statement cover-
ing all the resources and all the liabilities, of course.
By Mr. Hughes:
Q. That statement is made out by the officers of the bank?—A. That
statement is taken from the general ledger, sir, by our examiners. The bank
officers and the bank clerks render very little assistance to us. We do not
require it, and we do not ask for it. This is taken from the bank’s books
direct. The we have the contingent liabilities. Following that are the names
of all the directors of the bank, their post office addresses, and the number of
shares which they own, the number of meetings which they have attended since
the date of the last preceding examination, and with that is information as
to the liabilities of the directors, both individual and firm. We also have the
liability of the directors as endorsers or guarantors, and the directors’ occu-
pations, so that we have the total borowings from the bank both direct and
indirect, to which we add the loans to the officers and employees or directors.
After that. we list the total loans to corporations in which the directors are
interested. That is a very important schedule. We have the officers and
employees then, the president, the vice-president, the cashier and the assistant
cashiers, and their liabilities. There are questions as to bonding; that is
the surety bond; to what extent the officers are bonded; whether they are
surety or personal bonds; whether the bonds are adequate; whether they are
in force, and if so in whose custody; were they inspected, and as to the approval
of the bonds by the Board of Directors. Under the heading of ‘Loans and
Discounts” is included list of industries or classes of borrowers to whom loans
are being made; is the distribution satisfactory, both as to class of borrowers
and amount of loans; “state as to the general character of collaterals and advise
if a collateral register is maintained”; “List direct and indirect loans to cor-
porations or enterprises in which any director or officer is largely interested,
giving the name of interested director or officer.” If any borrow unduly, it
is listed on one of these other pages. “ Any liability of directors, or officers, as
makers, or endorsers, which is subject to criticism; describe fully and give
reasons”; “state whether all paper claimed by the bank as to property, includ-
ing collateral, appears to be properly endorsed or assigned to it, and all mort-
gages properly recorded and all collaterals accounted for.” The next item is
with reference to the rates of interest which are paid, the highest and the
lowest and the average rate. ‘Does the bank place paper with other banks,
and what is their liability in connection with that?” ‘ Does it appear to be
a liability?” “Is it covered by endorsement—”
(Mr. John W. Pole.]
_. BANKING AND COMMERCE 79
APPENDIX No. t
By Mr. Hughes:
Q. “ Placing paper’; that is, discounting it?—A. No, placed paper. We
call it “sold paper,” but that is not re-discounted paper; it is paper which is
perhaps sold to another bank and ostensibly without recourse, and very
frequently with a side guarantee on the part of the sending bank which estab-
lishes its liability, although that liability would not appear on the books. It
is an important thing, because many banks have got into trouble through that
source. It is a dangerous practice, but is indulged in quite frequently, especially
in the west.
By Mr. McMaster:
Q. Will you explain that practice, please?—A. This bank has a line to a
customer which perhaps is pretty nearly up to the limit in order that it may
dispose of some of this paper it sells it to one of its correspondents so that per-
haps it may take on a further line with this party, and endorses the paper with-
out recourse, perhaps, and that would dispose of it as far as the sending bank’s
liability is concerned, but the cashier will send a letter advising the receiving
bank to charge that up to the sending bank’s account when due, and that it will
be taken care of, which constitutes a guarantee. That is the practice indulged
in.
Q. What is the advantage of endorsing without recourse?—A. So that the
liability may not appear on the bank’s books. ‘“ List certificates issued by other
National Banks, saying how carried, and giving full information.” Then there
is a list made of all other National Bank stock, giving the names of the bank.
The next item is with regard to the credit data which may be available in the
bank, and as to the credit files and credit information. Then we go on and make
a list of all the loans which are statutory bad. That is, any loan upon which
no interest has been paid within six months, and which is not well secured and
in process of collection. That is a statutory bad debt. That is listed. The
other overdue paper is of course listed, and scheduled in detail so as to show
the aggregate of overdue paper in ratio to the number of loans which are made.
We next make a schedule of the loans which are in excess of the limit. That
is a practice which banks indulge in quite freely
By Mr. Maclean:
Q. Who makes that limit?—A. That limit is fixed by law, Mr. Maclean.
By Mr. Coote:
Q. Would you care to explain what that limit is?—A. That limit is in
section 5200, of the National Bank Act, and covers a very wide range of excep-
tions.
Q. Would you give it to us in a general way?—A. In a general way the
limit of loans is 10 per cent of the capital and surplus of the bank.
By Mr. Maclean:
Q. To one customer?—A. To one customer, but there are a number of
exceptions to that. For instance, business or commercial paper is an exception
to that. Loans secured by commodities readily marketable, and non-perishable
are. There are other exceptions Liberty Bonds and otherwise. The 10 per
cent limit applies to the generalities of paper. I will file with you a schedule
giving the various exceptions to the 10 per cent limit on loans.
Document filed as EXHIBIT No. 2 (See page 80).
[Mr. John W. Pole.]
80 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
EXHIBIT No.2 .
Schedule of loans and amounts loanable above 10 per cent of bank’s capital
and surplus.
The amounts which a national bank may properly lend to any one person,
company, corporation, or firm (including in the liability of a company or firm
the liabilities of the several members thereof) under the various clauses of
section 5200, as amended by the act which became effective October 22, 1919,
are stated in terms of the percentage of the paid-up and unimpaired capital
stock and surplus of the lending bank.
Character of loans.
Amounts loanable.
(A) Accommodation or straight loans, whether or
not single name.
Loans secured by stocks, bonds, and author-
ized real estate mortgages.
(B) “Bills of exchange drawn in good faith against
actually existing values.”
The law expressly provides that this phrase shall
also include:
(a) DRAFTS and bills of exchange secured
by shipping documents conveying or
securing title to the goods shipped.
(b) DEMAND OBLIGATIONS, when se-
cured by documents covering commo-
dities in ACTUAL PROCESS OF
SHIPMENT.
(c) Bankers’ acceptances of the kinds de-
scribed in section 13 of the Federal
reserve act.
(C) Commercial or business paper (of other makers)
actually owned by the person, company, cor-
poration, or firm negotiating the same.
(D) Notes secured by shipping documents, ware-
house receipts, or other such documents con-
veying or securing title covering readily mar-
ketable non-perishable staples, including live
stock.
No bank may make any loan under (D), how-
ever—
(a) Unless the actual market value of the
property securing the obligation is not
at any time less than 115 per cent of
the face amount of the note; and
(b) Unless the property is fully covered by
insurance, and in no event shall the
privilege afforded by (D) be exercised
for any one customer for more than 6
months in any consecutive 12 months.
“E) Notes secured by not less than a LIKE FACE
AMOUNT of bonds or notes of the United
States issued since April 24, 1917, or by cer-
tificates of indebtedness of the United States.
(F) Notes secured by United States Government ob-
ligations of the kinds described under (E) the
face amount of which is at least equal to
105 per cent of the amount of the customer’s
notes.
Maximum limit, 10 per cent of bank’s paid-up and
unimpaired capital and surplus.
No limit imposed by law.
The inclusion of ‘‘drafts’’ will bring within the
exception drafts drawn by an agent on his princi-
pal if secured as indicated and a sale of commo-
dity is not a necessary basis.
Includes both notes and drafts.
“Actual process of shipment” does not mean actually
loaded on cars, but covers good faith assembling
and delivery to the carrier without unnecessary and
unavoidable delay.
These are acceptances of other banks.
No limit imposed by law.
15 per cent of bank’s capital and surplus, IN ADDI-
TION TO the amount allowed under (A); or if
the full amount allowed under (A 1s not loaned,
then the amount which may be loaued in the man-
ner described under (D) is increased by the Joan-
able amount not used under (A). In other words,
the amount loaned under (A) must never be more
than 10 per cent, but the aggregate of (A) and (D)
may equal, but not exceed, 25 per cent.
10 per cent of bank’s capital and surplus, IN ADDI-
TION TO the amount allowed under (A); or if the
full amount allowed under (A) is not loaned, then
the amount which may be loaned in the manner
described under (E) is increased by the loanable
amount not used under (A). In other words, the
amount loaned under (A) must never be more than
10 per cent, but the aggregate of (A) and (E) may
equal, but not exceed, 20 per cent.
No limit, but this privilege, under regulations of the
Comptroller of the Currency, expires Dec. 31, 1920.
{Mr. John W. Pole.]
BANKING AND COMMERCE 81
APPENDIX No. 1
The Witness: Mr. Chairman, am I following about the line the Committee
wishes?
The CHAIRMAN: Very much so.
The Witness: I am anxious to give you about what you want to the best
of my ability. The banks are permitted to lend money on real estate; they are
permitted to do so to a certain extent. They are permitted to lend money to
single individuals, but not in excess of the 10 per cent of the capital and surplus,
on real estate that is improved.
By Mr. McMaster:
Q. Up to any proportion of its value?—A. Up to 50 per cent of its appraised
value, but not to exceed in the case of improved country property five years’
maturities, and in the case of improved city properties, one year maturities.
By Mr. Hughes:
_ Q. Appraised by whom?—A. Not necessarily the assessed valuation, but a
fair appraisement which has to be arrived at in the best way possible.
By Hon. Mr. Crerar:
Q. Which includes the improvements?—A. Which include the improve-
ments.
By Mr. Maclean:
Q. And take into consideration any existing mortgages?—A. It has to be
a first lien, and it has to be within the Federal Reserve District in which the loan
is made or within one hundred miles of that District. A bank may loan to the
extent, in the aggegate, of 25 per cent of its capital and surplus, or one-third of
its time deposits on real estate. Under the McFadden Bill which has recently
been introduced and which we hope will pass, as it clarifies the National Bank
Act, and is the first real clarification which the Act has had since 1865, the banks
are to be permitted to increase their real estate loans up to 50 per cent of their
time deposits, and in order that the city real estate loans may become more
liquid the maturities are extended from one to five years. There is a market in
the United States for loans which do not mature inside of five years, where there
is none for loans which mature within one year. A bank, however, may protect
itself by taking a mortgage or anything else in order to save itself from loss on
a debt which has been previously contracted, either a first, second, third mort-
gage, or anything else.
The next very important item is the large lines. That is, large lines of credit
which are not technically excessive but which are too large, perhaps, for the
size of the bank, and generally regarded by the examiner as an undue extension
of credit. All lines which are believed to be subject to criticism as representing
unwarranted extensions of credit to the same or affiliated interests include loans,
stocks and bonds and other forms of credit, and such lines which may be dis-
proportionate to the bank’s resources. These lines are listed together with the
collateral. There is another schedule for other lines especially mentioned, which
appear to be large, and upon which the credit information is so meagre that the
examiner has no means of arriving at the value of these loans. The next is a
schedule of current loans which are classified under “slow” “ doubtful,” and
“losses”; following which is a schedule of the bonds and securities held by the
bank, together with the character book value, and the market value. The items
of real estate, other real estate owned. Then there are the banking houses. A
National Bank is not permitted to own real estate other than for purposes of
a banking house which it occupies or expects to occupy, but the bank does, of
course, acquire real estate by reason of having to take it for previous debts, and
that is usually an extremely slow item.
(Mr. John W. Pole.]
82 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Hughes:
Q. How long is it allowed to hold that real estate?—A. That real estate
may be held for five years.
By Mr. Marler:
Q. It can only be held for five years?—A. Yes.
Q. What happens then?—A. The law requires it must be disposed of in
five years. If it is not, it has to be disposed of as soon as it can. I think you
carry it here for twelve years, do you not?
Q. Yes?—-A. And there is a penalty if it is not disposed of within the time
—is that correct?
Q. Yes?—A. But one of the weak features of the National Bank Act is
that the punishment more than fits the crime, very often. About the only remedy
of that kind which the Comptroller has is to bring suit for forfeiture of charter,
which, of course, would be an absurd thing to think of in the event of the bank
holding real estate longer than five years.
By Mr. Hanson:
Q. Do they ever resort to that?—A. He never has resorted to it.
By Mr. Woodsworth:
Q. Could that five years be extended?—A. Of course, we are in this posi-
tion; that if the bank acquires real estate, and after the time has elapsed—five
years have elapsed—it is not possible to dispose of it, there is nothing to do but
to keep it, so that time is automatically extended, and nobody says anything
about it, except to have it disposed of as soon as possible.
By Mr. Spencer:
Q. There is no enforced sale?—A. No enforced sale at all.
By Hon. Mr. Crerar:
Q. In that case it is carried as an asset of the bank?—A. Of course, as an
asset of the bank.
By Mr. Woodsworth:
Q. If this property should be transferred to a holding company, in which
the bank controlled the greater part of the stock would this be considered as
legitimate?—-A. The bank, of course, would not be permitted to hold the stock
in this affiliated company, but the directors might personally hold that stock,
and if they saw fit, to take this real estate out of the bank, it would be perfectly
permissible for them to do so. In other words, the bank would deal with that
affiliated corporation as it would deal with any other disinterested corporation.
Q. But the bank itself would not be permitted to control the stock?—A.
The bank would not be permitted to control the stock, excepting that this stock
control may be held through the shareholders of the bank itself.
By Mr. Shaw:
Q. In the case you suggest, the bank would have to have its claim paid in
full?—A. Well, not necessarily have its claim paid in full. It might loan the
corporation money to purchase the real estate, or it might sell the corporation
that piece of real estate at a price which was regarded as fair, but not perhaps
at its full value, at which it was carried on the books of the bank.
By Mr. Woodsworth:
Q. Does that same rule apply to other subsidiary companies?—A. As regards
stock?
(Mr. John W. Pole.]
..BANKING AND COMMERCE 83
APPENDIX No. 1
Q. Yes?—A. With the exception of stock in safety deposit companies
and stock in corporations organized to do a foreign banking business, and of
course stock held by the National Bank in the Federal Reserve Bank must be
held. Those are the only cases.
Q. What about holding companies in the case of bank premises?—A. A
bank may hold an interest in that.
By Mr. Hughes:
Q. An interest or a controlling interest?—A. Either an interest or a con-
trolling interest. Now, we were speaking of the banking houses—as to the
valuation of the banking houses, and as to whether or not they are carried at a
fair valuation, whether or not they were suitable and convenient, whether or
not they are free of encumbrance, adequately insured, and as to the vaults, and
so forth.
By Mr. Coote:
Q. Is there any limitation placed upon the amount which a bank may
invest in bank premises?—A. There is nothing in the law to that effect.
By Mr. Woodsworth:
Q. How is the value of the bank premises determined?—A. That might be
determined on an income basis, or an appraisal basis, but the bank, as a general
thing, carries its investment in banking house at a very conservative value, and
an effort is made to see that this is done.
Q. It is quite possible, however, to arrive at a fair value of the bank’s
premises?—A. Appraisement of bank premises is very frequently made by a
Real Estate Board or a Board of Appraisers, or engineers, which may be
appointed by the bank or by the Department, and if there is any dissatisfaction
arising between the bank and the Department, as to the value of the banking
houses, the Comptroller has the authority to have an appraisement made, and
acts as he sees fit in that respect.
By Mr. Spencer:
Q. What percentage of the bank’s capital is invested in the banking house?
—A. There is nothing in the National Bank Act regulating that. That is at the
discretion of the Board of Directors.
Q. I understand that, but what is the usual percentage?—-A. As a general
thing?
Q. Yes?—A. It varies so widely it would be difficult to say.
Q. What is the average?—A. I would say the average would be 50 per cent
in small banks. It varies so widely I really cannot place an estimate on it.
There would be no such thing as “ an average.”
By Mr. Coote:
Q. You have no figures?—A. I have no figures.
By Mr. McMaster:
Q. As a banker what do you think is a proper figure to invest in banking
premises as compared with the total resources?—A. The conditions vary so
greatly in the different communities that I would not care to express myself on
that point. It is a point which has been discussed so very much but I do not
think very much has been arrived at.
By Mr. Maclean:
Q. They do not decide that definitely in any bank?—A. No, but there is
an effort made to keep down the carrying costs of a bank as much as possible.
{Mr. John W. Pole.]
84 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Woodsworth:
Q. Is the value of a bank’s premises written down from year to year so it
will be ultimately eliminated?—A. It may be, but it is not done in a great many
cases.
Q. Is it not required?—A. It is not required at all, no. The bank is per-
mitted to carry its banking house at a fair valuation.
Q. May a bank erect a large office building and occupy simply a part of
the premises?—A. Yes, that may be done; there is no objection to that.
By the Chairman:
Q. Is it usual for banks to create a secret reserve by valuing up, or work-
ing up or down the valuation of the premises?—A. Frequently in the bank
buildings, yes.
Q. In other respects?—-A. Frequently.
By Mr. Hanson:
Q. Do they frequently do that in regard to other securities?—A. We
require that all the assets be carried on the books of the bank. Of course,
these accounts are sometimes built up, but if we discover them, we require
them to be shown on the books.
Q. Are they ever written down to secure secret reserves?—A. If so, we
require them to be placed at their legitimate value. You are speaking of bonds
and securities?
Oy Mies:
By the Chairman:
Q. If you discover that the assets of a bank have been written down so
as to create a secret reserve, there is objection to that?—-A. Seriously.
Q. You require that they show on the returns the actual value?—A. Yes,
except with regard to banking houses which are there to speak for themselves.
Q. If you discover in your inspection of the real estate and buildings
where the banking houses have been written down, you would not object to
that written down valuation?—A. No, we would not object to that, but in any
other assets we would object; we, would require them to be put on the books
at a fair value.
By Mr. Woodsworth:
Q. How many classes of collateral are distinguished in that schedule?—
A. There is simply a schedule here for bonds and securities. Did you say
classes of collateral?
Q. Yes, how many classes of collateral are distinguished in the schedule?
—A. In the bonds and securities, do you mean?
Q. In the schedule mentioned by you a little while ago, are there different
classes of collateral mentioned?—A. That is, as to the general character of
collaterals?
Q. Yes—A. There are no schedules. That is merely a guide for the
examiner. In the office of the bank he would schedule the predominant kind
of collateral, and if he found much collateral in certain classes of stocks, and
that sort of thing, he would bring that out in his examination and in his
reports. Other particulars of cash items are, of course, carefully gone into.
“ Capital Stock ’—The National Bank is not permitted to own shares of its
own stock. If it does acquire any, it has to be disposed of within six months.
By Mr. W. F. Maclean:
Q. It cannot hold its own stock for a pension fund?—A. It cannot hold
its own stock for any purpose longer than six months and then it has to be
sold by public auction.
(Mr. John W. Pole.]
BANKING AND COMMERCE 85
APPENDIX No. 1
By Mr. Coote:
Q. Can it hold the stock of other banks?—A. As collateral only. It may
not own stock in other banks.
Q. May it own stock of a trust company that is merely subsidiary ?—A.
It may not, no.
By Mr. Woodsworth:
Q. Is the holding of stock deemed to be a basis for credit?—A. You mean
in the bank?
Q. Yes.—A. Not at all; a bank cannot lend on its own stock.
By Mr. Hanson:
Q. But another bank can handle that?—A. Yes, another bank can handle
that.
Q. Is there any double liability for a bank?—A. There is.
Q. Do you recommend a retention of that?—A. By all means.
By Mr. Woodsworth:
Q. How are you able to enforce payment of the double liability?—A.
That payment may be enforced by the Receiver, or the creditors themselves
may bring in a bill for the enforcement of the double liability, in the case of
an insolvent bank. Of course, in the case of a bank whose capital is impaired,
while a bank may not be insolvent, its capital can be impaired, and the double
liability is enforceable in those circumstances.
By Mr. Shaw:
Q. Even without a bank becoming insolvent?—A. Even without a bank
becoming insolvent. If the capital becomes impaired, the assessment notice
may be served upon the shareholders.
By the Chairman:
Q. Is it done in practice?—A. Oh yes, very, very frequently.
By Mr. W. F. Maclean:
Q. Under the law, is that the practice?—A. That is a provision of the
Bank Act.
Mr. McMaster: May I suggest to the members that the witness has not
yet finished his evidence on inspection.
By Mr. W. F. Maclean:
Q. There is a bill, I think you said, before Congress?—A. Yes.
Q. Does that provide for a consolidation of the whole system up to date?
—A. I would say that it is the National Bank Act brought up to date. I
would not say that it is a consolidation of any systems.
Q. It brings it up to date?—A. It brings it right up to date.
Q. And it is likely to go through?—A. Well, I think so, though it is pretty
hard to tell now.
Q. It has provision in it for the protection of the public?—A. Yes, it has;
very marked improvements.
The CuairmMan: I would suggest that Mr. Pole be allowed to complete
his statement in respect to bank inspection and then members will be per-
mitted to ask him questions on any points that suggest themselves.
Wirness: I come now to the question of dividends and surplus. The
report of the examiner requires “ Date of declaration of last dividend; when
reported; was it semi-annual or quarterly.” After each dividend period the
bank, under the law, has to submit to the Comptroller of Currency a report of
earnings and dividends. I will file this as EXHIBIT No. 3. That report of
(Mr. John W. Pole.]
86 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
earnings and dividends is carefully inspected by the examiner at the date of
the examination which follows the declaration of that dividend. Then there is
the question “ Whether the bank includes all interest received with gross earn-
ings, and all interest paid with expenses; state whether any profits are irregu-
larly carried on the individual ledger, in special accounts, or charged off the
books.” I believe you asked that question as to the building up of this sur-
plus on one thing and another. With regard to itemized expense accounts,
these are, of course, inspected by the examiner and any items which seem to
be irregular are further looked into. Then there is the question, “Do the
directors or examining committee approve expense account periodically, and,
if so, how frequently; do the minutes record such action; did you inspect all
earnings accounts from date of last examination; state amount of losses charged
off since last examination on loans and bonds, and state amount recovered on
charged-off assets since last examination.” Then we come to the items in
regard to individual deposits. “State minimum and maximum rate of interest
paid on open accounts. What is the rate on certificates of deposit? State
whether a proper record of all certificates of deposit, cashiers’ cheques and
certified cheques issued is regularly kept,’ and so on. “If this bank conducts
a savings department, give method of verifying pass-books and rate of interest,
and state whether interest is paid quarterly, semi-annually or annually,” and
that sort of thing. Then as to previous notice of withdrawal of savings deposits,
“ Give total of dormant ledger; how are withdrawals safeguarded?; State whether
surrendered certificates are properly cancelled and filed in numerical order for
auditing; state whether certificates, cashiers’ cheques, certified cheques, individual
savings, and dormant ledgers were audited at this examination, and were certi-
ficates of deposit checked against list taken at previous examination.” As to
surrendered certificates of deposit, as to the cancellation and filing of certificates,
as to cashier’s cheques, individual savings and dormant ledgers, we go into these
things very carefully. ‘State whether a numerical list of outstanding certifi-
cates of deposit was made for use at the next examination.” Our examiners carry
with them away from the bank a list of their own covering the certificates of
deposit so that they may not depend on the banks’ account for them.
‘“Rediscounts and borrowed money—Has the bank any liabilities which
are not shown on the books? Does the bank borrow habitually, and if so,
whether from Federal Reserve Bank or elsewhere?” Then comes a list of the lia-
bilities for money borrowed whether it is on bills payable or on rediscounts,
or on open accounts, or certificates of deposit, or bonds sold under re-purchase
agreement or otherwise. They have to give particulars with reference to that,
the date of borrowing, the date of maturity, the interest rate, the security
pledge and the form of borrowing, whether authorized by the Board of Dir-
ectors; the grand total of those borrowings from the Federal Reserve Bank or
the War Finance Corporation or any other source.
The next items are in regard to “ Books and Accounts.” As to the general
ledger, “By whom kept?” and a great many other questions of a clerical
nature which would be asked in any ordinary examination.
By Mr. W. F. Maclean:
Q. Is this form complied with in every case, or only when an examiner
comes in? Or is it the general practice?—A. This report is made by the
examiner only. There is no form of report of this character sent to the bank
for submission to the Comptroller. That is what you mean, is it?
Q. Yes—A. No.
Q. There is no regular examination?—A. The examinations are made at
irregular intervals.
(Mr. John W. Pole.]
BANKING AND COMMERCE 87
APPENDIX No. 1
Q. Then there may be some banks that do not come under that?—A. All
of them. Every National Bank is examined twice a year.
Q. It is a regular system then that they have to comply with?—A. They.
are regularly examined twice a year but at irregular periods.
' The next heading is “Information in connection with management and
supervision by directors—State how often directors meet as a board, and day of
week or date of month usually held; in what manner do they authorize or
approve loans or discounts?; state whether they have an active discount com-
mittee; are their meetings and actions properly recorded?; state whether they
nh an active examining committee; is a complete and satisfactory report on
e.!
Fo Be Mer MciWaster :
Q. These questions would pre-suppose that directors were directing a bank?
Mr. W. F. Mactran: It is to find out whether they do or not.
_ Witness: I do not know; we do not go so far as to pre-suppose that the
directors do direct; we rather pre-suppose that they do not direct.
By Mr. Hanson:
Q. What is the result; do you ascertain that they do direct?—A. That is
the purpose of this question, to find out whether or not the directors are really
directing the bank, although it does not cover the whole subject.
By Mr. McMaster:
Q. For instance, the discount committee, that pre-supposes that the action
of the directors in regard to on paper presented for discount is passed upon?—
A. Here is question No. 3. “State whether they have an active discount com-
mittee,’ and if so, ‘“ Are their meetings and actions properly 1ecorded?” No,
unfortunately, we cannot assume that the directors always direct.
By Mr. Hughes:
Q. Would the discount committee be necessarily composed of the directors?
—A. Directors or officers of the bank; probably two or three directors and an
active officer or two, but not composed entirely of active officers of *the bank.
Q. And not composed entirely of directors either?—A. Probably, at least
one officer of the bank.
By Mr. Woodsworth:
Q. Is there any limit to the amount that may be borrowed by directors or
officers?——A. They are precisely in the same position as any other borrower,
there is no distinction made between directors and other borrowers.
By Mr. Hanson:
Q. Is there any limitation to the borrowing powers of the officers?—-A. None
at all, except as may be regulated by the bank itself, which is frequently done;
and it is frequently put into by-laws that directors’ loans, for instance, shall
be supported by adequate collateral, that there shall be no open lines to directors.
By Mr. McMaster:
Q. No open lines?—A. No unsecured loans to directors. That may be the
case, and sometimes is, but not under the Bank Act. It is a regulation of the
Board in their by-laws. As to whether or not the minutes record the action
which is taken on the report of the last examination, this report of the examina-
tion is returned to the bank, and the directors are expected to at least read it,
and be guided by it; and it is required that they note in the minutes just such
action as may have been taken in regard to it. i
(Mr. John W. Pole.]
88 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Woodsworth:
Q. Has any suggestion ever been made that there should be a limit to the
amount which may be borrowed by directors or officers?—A. I do not know
whether that has been done. Of course, the State laws cover that very
frequently, but it is usually nullified by some clause which requires a two-third
vote of the directors. No director may borrow beyond a certain amount unless
he has a vote of two-thirds of the members of the Board, or something of that
kind, which, of course, does not amount to very much.
By Mr. Millar:
Q. Is there a tendency on the part of the weaker banks to pay dividends in
excess of earnings?—A. Yes, there is.
By Mr. Hughes:
Q. National Banks?—A. National Banks. I understood you to say a dis-
position.
Mr. Mizar: Yes.
By Mr. Hanson:
Q. Are they allowed to pay a dividend for the current year unless they earn
it?—A. Yes, provided their surplus account is in excess of 20 per cent of the
Bank’s capital. But that is a stationary or legal surplus, and cannot be touched
for dividend purposes.
By Mr. W. F. Maclean:
Q. If a bank is headed in the wrong direction, would two of your inspections
under this system—A. Develop it?
Q. Would they expose it, or protect the public in connection with it?
Would two inspections pretty well ascertain that fact, that it was heading the
wrong way in view of the bank examiner?—A. Well, there might be conditions
which within a year might not definitely determine that a bank was headed in
the wrong direction. The general trend might be upward. At the same time,
there might be a temporary back-set, and it would be hardly fair to say that
the bank was on the down-grade. There might be a temporary depression of
some kind which might affect the bank.
Q. But the average, you would actually catch it?—A. Well, of course, if it
would demonstrate the fact that it was on the down-grade within the year, yes.
It might have four examinations in that time or more if the decline were marked.
By Hon. Mr. Crerar:
Q. How many National Banks are there?—A. 8,300.
Q. How many failures have you had in the last three years?—A. Last year
was a record year. There were 79 National Banks closed last year.
Q. Out of 8,000?—A. 8,300.
Q. Were these banks subject to the inspection you have just told us about?
—A. Yes, they were.
Q. How do you account for the failures? What is the reason?—A. Very
largely those failures were confined to the North West.
Q. In the agricultural area?—A. In the agricultural districts and ,down
through the Central States to New Mexico and the cattle country. The decline
of prices was so great, and land values and the value of every commodity shrunk
to the point that the paper became valueless. Of course, there were instances
of certain large defalcations.
{Mr. John W. Pole.}
BANKING AND COMMERCE 89
APPENDIX No. 1
By Mr. McMaster:
_Q. Did they account for any substantial number of the 79?—A. The defal-
cations?
Q. Yes.—A. No, not a substantial number.
By Mr. Shaw:
Q. Did the depositors lose in every one of those cases?—A. No, by no means.
Q. In what proportion of the 79 would you say the depositors lost?—A. I
should say in 50 per cent of them.
Q. And in the remaining 50 per cent, I suppose they will not all lose 100
cents in the dollar?—A. No, I do not think that in any case they will lose 100
cents on the dollar; not all in any case.
Q. When you speak about failure, do you mean by that that the bank
closed its doors?—A. Yes, the bank is taken charge of by the Comptroller.
Q. You are going to tell us of the closing up by the Comptroller before
you get through?—A. Yes.
By Mr. McMaster:
Q. Can you give us the aggregate capital of those banks that failed in
comparison with the aggregate capital of the whole 8,000?—A. It is negligible.
I am not prepared to give those figures at the moment.
By Mr. Shaw:
Q. Could you send them to us?—A. Yes. They were published in the
Comptroller’s report, and I will be glad to submit them to you.
By Mr. Marler:
Q. Those particular banks were operating, I suppose, or lending on certain
specified commodities in those particular districts; did that account for the
failures?—A. Not altogether, because the truth of the matter was, that the
banks were lending on no commodity at all as a general thing. Those were
small country banks; a large number of those 79 banks were country banks,
which had lent money to farmers whose prospects were good at the time they
lent the money, but who had successive crop failures of one kind and another,
not secured as a general thing by commodities, but more upon paper for agri-
cultural purposes.
Q. To a particular class of people?
By Mr. W. F. Maclean:
Q. That has been a marked feature of recent years, the failure of farmers
and the decline in their prices?—A. Yes. Of course, there has never been a
time when there were more failures; that was a record year for bank failures,
last year.
By Mr. Woodsworth:
Q. Could you give us any idea of the percentage of double liability which
could be collected in those 79 failures?—A. I should say 50 per cent.
By Mr. Marler:
Q. Have those banks access to the Federal Reserve Bank?—A. Those
National Banks are members perforce of the Federal Reserve System.
Q. And they had all the advantage of that system?—A. They had all the
advantages of the system.
By Mr. W. F. Maclean:
Q. In the case of a member bank having to file a statement of its condition
to the Central Reserve Bank, is not every member more or less a check on
(Mr. John W. Pole.]
A. Usually farmers.
90 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
every other member bank by reason of that information being in possession of
the head National Reserve Bank in that region?—A. You are speaking of
Federal Reserve Banks themselves?
Q. No, the member banks. Each member bank has to give a statemen
to the Central Reserve?—A. Yes.
Q. Is not that information available to every member bank?—A. Oh no,
not at all.
Q. One bank could check all the other banks?—A. Not in any sense.
The CuarrMAn: May I suggest that we carry on with the witness’s state-
ment on the bank inspection.
Hon. Mr. Stevens: I was the one to suggest that procedure, but I would
like to ask one or two questions.
The CHairMAN: I would like to give you all an opportunity, but I think
we will make more headway, and the evidence will be more intelligible, if
the witness is allowed to go on. I think hon. gentlemen will be in a better
position to put questions they have in mind if they would follow that rule.
Hon. Mr. Srevens: Try to make the application of that rule general,
Mr. Chairman.
The CHarrMaANn: I shall do my best.
Mr. Huaues: With all due respect, I think that occasional short questions
bring out the point better.
The CuHarrMan: I will ask the witness to carry on with his statement as
to bank inspection.
Wirness: In regard to the question of information in conection with the
management and supervision by directors, we come to the question of whether
or not loans and discounts to the firms and corporations in which directors
are interested, are specially acted upon by the Board, and as to whether by-
laws are declared and their provisions observed; as to whether important letters
from the Comptroller to the bank are filed in the minutes. That is in reference
to letters and correspondence which may be conducted in following the exam-
ination of the bank and on which the directors are expected to be advised and
informed.
Then we come to the section with regard to affiliations “ State whether there
is any affiliation with any State Bank, savings bank or trust company through a
controlling ownership of stock by the same shareholders, by practically the same
management, or in any other manner, giving the name of affiliated bank.” “If
transfer of certificate of stock of the National Bank transfer ownership of stock
of the affiliated bank, state that fact.” “State whether stock of affiliated bank
owned by shareholders of National Bank is held by them individually or as a
corporation.” “State whether stock of affiliated bank is trusteed for benefit of
shareholders of National Bank.” “ State whether any director or other officer
of this bank is an officer of any other bank”, and so on. |
Then comes the recapitulation as to the “slow” “ doubtful”, “losses”,
estimated value of assets not shown on the books, and under these various
headings “ Bad debts, other overdue papers, all other loans and discounts, over-
drafts, premium on United States bond, bonds, securities,” etc., banking house,
furniture and fixtures, other real estate, cash items, shortages, judgments, unpaid
bills, etc., as to whether estimated losses were charged off at the conclusion of
the examination. After that examination has been completed, the examiner -in
case the bank is in an unsatisfactory condition, and has losses of consequence, is
expected to call the Board together and discuss these various problems with the
Board with a view to getting correction, and it is expected that the Board will
pass a resolution at that meeting charging off the losses which the examiner
{[Mr. John W. Pole.]
BANKING AND COMMERCE S)
APPENDIX No. 1
has estimated. He then lists his criticisms, if any, with regard to the bank, as
to the bank’s assets, or the management, or anything else.
That constitutes the form of examination which is returned to the bank.
The bank has a copy of that examination, but there also goes to the Federal
Reserve Bank, and comes to the Comptroller’s office what is known as “a
supplemental report of examination” which is all confidential. It does not go
to the bank. In fact, the bank does not know there is any confidential section
in the report on the examination. This covers some rather important things
which I think will be of interest to you, with regard to the salaries of officers
and employees, the position of various officers and the directors and their yearly
salaries to all employees, so it gives you the entire salary list of the bank; the
estimated worth of each director; as to whether or not their financial statements
are on file, as it is expected they will be; as to whether or not the bank holds
any large state, county, municipal or insular possession balances, subject
to cheque, and the rates of interest paid on them.
Then, of course at regular intervals three times during the year the Comp-
troller calls for a complete report of the bank’s conditions, which is a rather
voluminous report. That report is filed in Washington and is sworn to by the
officers of the bank, and is checked by the examiner when he returns to the bank.
By Mr. Hughes: .
Q. That report is made by the officers of the bank?—A. That report is made
by the officers of the bank.
By Mr. McMaster:
Q. How often did you say, sir?—A. Three times a year, or more often.
By Mr. Woodsworth:
Q. Before the report is completed, is there any consultation between the
inspector and the officers?—A. Before this report? Oh, yes. At the conclusion
of the examination he will call in the active officers of the bank, or the directors,
if it is a matter of consequence. Of course, if it is a matter which can be
corrected by the officers, well and good because if a bank is in satisfactory shape
there is no need of calling in the directors, but if there is anything that is not
running nicely the directors are expected to hold their meeting with the examiner
for the purpose of discussing these various things.
By Mr. Hughes:
Q. Did I understand you to say that a copy of the report made by the
examiner is given to the bank?—A. Yes, sir.
Q. Nothing confidential?—A. No.
By Mr. Woodsworth:
Q. In the case of a bank failure would the report of the inspectors afford
any indication to the depositors of a growing weakness?—A. No, the depositors
would have no access to that.
By Mr. Coote:
Q. Would the shareholders have access to that?—A. The shareholders
might have.
Q. But only if they asked for it?—A. Only if they asked for it. The
directors, of course, would be expected to be informed on the contents of the
forms.
By Mr. Marler:
Q. Where are these reports published?—A. Where are they published?
{Mr. John W. Pole.J
1—19
92 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Yes?—A. They are put up in typewritten form in the office of the Chief
Examiner of the district from which they emanate. There are five copies only
of them.
Q. No obligation for publication in any official newspaper?—A. No.
By Mr. Woodsworth:
Q. Is the Comptroller under any obligation to give the public any idea as
to the general tendency of any bank, if there is a weakness there?—A. Yes, sir.
Are you referring to the reports which the Comptroller calls for, which are made
by the officers of the bank at least three times a year? Of course, that has to be
published, not in detail, but the face of the report; the bank’s statement has to
be published in accordance with a certain form, Exhibit number—whatever it
is, but the report of the examination is not published.
By Mr. Marler:
Q. That is confidential?—A. It is more or less confidential.
By Mr. Woodsworth:
Q. My question was as to whether the Comptroller was under any obliga-
tion in a case of a bank evidently on the wrong line to give that information to
the public. Is. there any provision for that at all?—A. No, there is not. Of
course, if the capital of the bank is impaired then it is incumbent upon the
Comptroller of the Currency to see that it is re-established, but as to the condi-
tion of the slow paper, or paper which is unsatisfactory but not estimated as a
loss, for instance, the public would have no means of knowing that at all.
The CHairman: Mr. Stevens; you have some questions I believe you
wanted to ask. ‘
Mr. Srevens: I have several of them.
The Cuairman: You may proceed.
By Hon. Mr. Stevens:
Q. I have several questions I would like to ask. First, in regard to the
failures. I happen to have a Dunn’s report in my hand and it corroborates your
statement as to last year—I think you said seventy-nine?—A. I was speaking
from recollection.
Q. As a matter of fact it was seventy-seven, with $36,568,000 liability.
By Mr. Maclean:
Q. What is the total?
Hon. Mr. Stevens: That is the total liability of the National Banks.
The Witness: The total liability of the seventy-seven banks.
By Hon. Mr. Stevens:
Q. Then there were five hundred and one state banks with $167,000,000
liabilities which failed last year. Your department has nothing to do with the
State Banks?—A. Nothing whatever.
Q. They have separate State examiners?—A. Separate State examiners.
-Q. Appointed by the State authorities?—A. Appointed by the State authori-
ties.
’ Q. Could you tell me this although it may not be within your knowledge,
each State has a separate state law and system of examination?—A. That is
correct.
Q. Peculiar to itself?—A. Yes.
Q. And as a matter of fact there are a great variety of systems among the
State examiners, under the State laws?—A. Yes, a wide variety.
(Mr. John W. Pole.]
BANKING AND COMMERCE 93
APPENDIX No. 1
Q. I also have Dun’s report for the first four months of this year, and
please understand I am not offering this in criticism of anything you have said?
—A. I appreciate that.
Q. I simply want to bring out the facts, because they are very important
to us. Dun’s report for the first four months of this year show sixty-four
National Banks failing with a liability of $40,600,000. Is that correct?—A. I
would say that is about correct.
Q. And three hundred and cleven State banks?
Mr. Spencer: Out of how many?
The Witness: Twenty-two thousand.
Hon. Mr. Stevens: I have it here. There are eight thousand National
Banks, and a large number of State Banks.
The Witness: Twenty-one thousand nine hundred last year.
Mr. Suaw: Mr. Stevens, may I interrupt you to ask if you have figures
indicating the assets of these National Banks?
Hon. Mr. Stevens: No, it is not indicated in Dun’s report.
By Mr. Shaw:
Q. Have you those, Mr. Pole?—A. The character of the assets?
Q. No, the total value?—A. Yes.
Q.
Perhaps you could leave that with us?—A. Yes, I would be glad to.
By Mr. Maclean:
Q. And the total capitalization of the State Banks?—A. I think Mr. Stevens
said $36,000,000.
Hon. Mr. Stevens: $36,568,000 in the National Banks and $167,170,000 for
the State Banks.
Mr. Suaw: Those are liabilities, not assets.
Hon. Mr. Stevens: Liabilities.
Mr. SHaw: We want the assets of these banks.
Hon. Mr. Srevens: This is Dun’s report. I do not know whether Dun
would give the liabilities over assets. Anyway, these banks failed; they are
insolvent, and we may reasonably assume they would indicate pretty much their
liability to the public.
The Witness: When you say “ their assets ” you mean their assets of value?
Mr. Suaw: Yes.
The Witness: That would be pretty difficult to determine until the receiver-
ships would be wound up.
Mr. SuHaw: I thought you might have an estimate of that.
The Witness: It is practically impossible to make an estimate of that. We
have no estimate of that.
By Hon. Mr. Stevens:
Q. When you are filing your statement which you so kindly indicated you
would do, would you mind filing the number of National Banks that have failed,
say, during the past six years?—A. I would be glad to.
Q. And their liabilities and assets, as suggested?—A. I would be glad to.
Q. In connection with the examination of the banks under the National Bank
Inspection System, am I correct in suggesting or saying that it is quite impossible
to prevent failure?—A. You are correct in making that statement.
Q. You are speaking of course from a wide experience, as we know?—
A. Yes.
[Mr. John W. Pole.}
1—193 ,
94 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And you agree with that statement?—A. I do.
Q. I know now that I am on controversial ground as far as this Committee
is concerned, but what I am really after is to get the truth and not necessarily
to bolster up any particular theory, although some may think I am after theories
rather than the truth—
Mr. McMaster: Even with appearances to the contrary?
Hon. Mr. Stevens: I want to get the truth. Do you think it would be
possible to improve, for instance, the American examination system so as to
prevent failures and losses?
Witness: I don’t think it would.
Mr. Macrean: But perhaps to minimize it.
By Hon. Mr. Stevens:
Q. Now, another question along that line. You make an inspection twice a
‘year, or perhaps three or four times a year if a bank is not in an entirely satis-
factory shape?—A. Yes.
Q. Well now, when you make, we will say, the first inspection and you notice
something is weakening in the bank’s operations, at what point does the Comp-
troller of the Currency step in and declare the bank insolvent? What guides him
in that?—-A. When does he step in to declare the bank insolvent?
Q. Yes; take it over, under the law?—A. Of course, it is a far ery from a
bank which is in an unsatisfactory condition to a bank which is insolvent; and if
during the examination there develops perhaps a great deal of slow paper, the
summary of this report will indicate that a large proportion of that bank’s
assets are of a slow character, and you would analyze it precisely as you would
analyze a commercial statement, as to the proportion of slow paper which this
bank has in ratio to its current liabilities, and that would instantly present itself
to you perhaps as being a condition which would warrant the more urgent
attention of the Board, and the Comptroller would take that up at that point
and try to prevent the bank from slipping down and endeavour to instil some
constructive ideas into the situation, with the end in view that the bank might
strengthen itself and further support by collateral such paper which has been
listed as “slow”, or get that paper out of the bank while there was yet time.
That is the first operation.
Q. Quite so, but the next examination, and the succeeding examination might
show a progressive decline?—A. Yes.
Q. And it might be a year or a year and half before the Comptroller found
it necessary to step in?—A. Yes.
Q. Would that be a fair history of the ordinary failure?—A. I think it
might be.
Q. In the meantime the Comptroller does his best through the officers and
the institution itself to bring back into a healthy condition?—A. Yes. Of
course, while these failures are due in a large measure to prevailing economic
conditions, at the same time a very large percentage of them are due perhaps
to very poor bank management, and you cannot legislate to prevent that.
Q. No, but to a large degree the judgment of the Comptroller and his
chief examiners must be the determining factor as to when a bank should
actually be closed?—A. As to whether the bank should be closed?
Q. Yes?—A. Oh yes.
Q. It is a question which rests with the personal decision and estimation
of the Comptroller?—A. That is in conjunction with the members of the Board
who may be working with the examiner. I mean to say there is usually no
arbitrary position taken by the Comptroller.
[Mr. John W. Pole.]
BANKING AND COMMERCE 95
APPENDIX No. 1
By Mr. Hughes:
Q. With the Board?—A. The Board of Directors of the Bank. I mean
to say that one of our examiners will step into a bank and find it has a large
amount of slow and doubtful paper, and he will estimate the number of losses.
It will be from his analysis of it perfectly obvious to those directors of the
bank who are working with him that his statement is a fair representation of
the facts with regard to it, and then these matters are taken up with the ful!
Board, invariably when a bank gets into such a position as that. So it is
the combined opinion, not only of the examiner, but the right-thinking mem-
bers of the Board themselves who are willing to place a fair estimate on these
assets, which leads the examiner to his determination.
By Hon. Mr. Stevens:
Q. Just on that point: you have in that report a clause, or a heading,
under which examiners offer their criticisms?—A. Yes.
Q. In your experience as a chief examiner do you find it is a common or
uncommon occurrence for examiners in their written reports to make adverse
criticism?—A. Common.
Q. Quite common?—A. Very, very common. In fact, if things are run-
ning along smoothly it has not been the custom to pay any attention to it at
all, because the ground is taken that it is no more than a bank’s duty to con-
duct its business properly, and there are no compliments paid to the bank at all.
Q. But adverse criticisms are quite common?—A. Yes.
By Mr. Maclean:
Q. Even of savings banks, as a matter of fact?—A. Yes.
By Hon. Mr. Stevens:
Q. There is another question I would like to ask you while we are on that.
You know our system, I suppose, fairly well. Do you think that the system
of bank examination now in effect with regard to the National Banks of the
United States is applicable to the Canadian banking system?—A. I should
hesitate to answer that question because I am not really very familiar with
your system, but in a general way, I would say it is inapplicable.
Q. I will preface my next question with the statement that we have a
dual audit system here; that is, each bank under the new law which was passed
last year has two auditors, each distinct from the other—separate firms. They
make a report to the directors and general managers and so on. Would you
consider that that audit by the auditors of Canadian banks approximated the
examination made by the National Bank examiners in the United States?—
A. Not at all, sir.
Q. Would you mind indicating what, in your opinion, would be the dif-
ference?—A. Because I take it that the audits which you refer to are the
audits of accounts, and that sort of thing, and it is more a checking up of
figures than an appraisal of assets. Am I correct in that?
Q. Searcely. I think perhaps the question would be unfair unless I gave
you the full details of the law under which our auditors act, which of course
would be impossible just now. If you would not mind this afternoon or some
time before you leave running over our auditors’ duties and then answering
the question I think it would be of great value to this Committee.
The CHatrMAN: I would suggest if Mr. Edwards is here that he have a
conference with the witness to go into this matter, and the witness will then
be in a better position to make a comparison, perhaps to-morrow.
The Wirness: I should like to do that. Is Mr. Edwards your Banking
Commissioner?
[Mr. John W. Pole.1
96 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The CHairMAN: No, he is the advisor to the Minister of Finance.
The Wrrness: May I say a word there, please? The examinations of
the Comptroller of the Currency are not audits—
Mr. Macitran: That is the point.
The Witness: A large majority of banks in addition to the examinations
each year made by the Comptroller, employ auditing concerns to analyze their
affairs once or twice a year; people like Marwick, Mitchell, Peet & Company,
and other large auditing concerns.
By Mr. Marler:
Q. Chartered accountants?—A. Chartered accountants.
By Hon. Mr. Stevens:
Q. Would the Comptroller of the Currency or his chief examiner accept
the report of these auditors as to the accuracy of the accounts?—A. Yes.
Q. And base their examinations— —A. No. The directors under the law
are required to understand the internal matters in connection with the bank
which they are directing, and in order that they may comply with the law in
that respect, it is necessary they make an examination of the bank in order
that they may be advised, but they have been permitted to employ these firms
of accountants to assist them in making these examinations, and it is usually
in that manner in which these accountants are employed.
Q. Would they be permitted to employ an accountant who was the auditor
of the bank?—A. No.
Q. They would have to have another firm?—A. The Comptroller would
have no objection to the bank making any number of examinations of any
character they felt disposed to make, but it would not be accepted by his
Bureau.
Q. Now, a word in regard to real estate. Are the banks compelled to carry
the real estate at its present value? Supposing a bank in New York owned and
occupied property in Fifth avenue, or in Forty-second street, or some other
expensive locality, but had occupied that property for thirty years and originally
bought it rather cheap; would they carry it on the books at cost or each year
write it up as its assessed valuation increased?—A. That is a very unusual case
you are citing. In case the bank owned a piece of property like that the
probabilities are there would be a definite market valuation placed upon it.
Q. Is it obligatory for them, under the law, to maintain a property account
of present value?—A. In a general sense a bank is required to show on its asset
list the true value of its assets. There is no particular reference made to real
estate.
By Hon. Mr. Crerar:
Q. Does the law permit you to write it up?—A. Yes, they may carry that
asset at a fair value.
By Hon. Mr. Stevens:
Q. You may not be able to answer officially for the Comptroller of the
Currency, but from your own position as a chief examiner you are very familiar
with the banking business of the United States. Are you favourable to a scheme
of a government guarantee of deposits?—A. By no means.
Q. Would you mind indicating in one or two ways your objection?—A., I
must cite the experience of those states, of which there are several, which have
undertaken to guarantee deposits and which have been universally a failure.
The State of Mississippi for instance.
By Mr. Spencer:
Q. The guarantee of deposits in private institutions? —A. The State Banks;
not private institutions,
{Mr. John W. Pole.]
BANKING AND COMMERCE 97
APPENDIX No. 1
Q. You were not talking about guaranteeing deposits in Government
institutions?—A. No, I am not saying that, but that is what brought up the
question.
By Hon. Mr. Stevens:
Q. I was speaking of American banks.—A. Yes. The State of Mississippi
has a guarantee law and the fund is now in such condition that I think gt
would take fifty years at the full assessment under the law to meet its present
liabilities. The values have reached a point where the guarantee fund is insuffi-
cient to pay the warrants outstanding against it. Under the system, when a
bank fails, the State issues its warrants, which draw six per cent, until these
assets have been liquidated, so that the Treasury may be reimbursed, and these
warrants paid in numerical order. They are $2,000,000 behind now, and I think
they are going to annul the law.
Q. Do you know of any indication that where a State guaranteed the
deposits there was any noticeable slackening of effort and care on the part of
the bankers?—A. I am not in a position to speak of that.
Hon. Mr. Stevens: Perhaps the question is not a fair one.
Q. What you said in regard to being opposed to guaranteeing bank deposits
applies to the National Bank system as well as to the State?—A. As well as to
the State.
Hon. Mr. Ross: I might not be here this afternoon and I would like to
ask a question.
Q. You are Chief Examiner of the Federal Banks of the United States,
Mr. Pole?—A. No, the National Banks. When you say “ Federal,” I take it
you mean the Federal Reserve?
Q. Yes?—A. No; the Federal Reserve Banks have a system of their own.
Q. Would you mind filing with this Committee, or sending it to me for
reference in the Department, the statutory or written authority of your office,
showing the extent of the authority, and also the limitations of the Chief
Examiner?—A. Of our office?
Q. Yes?—A. Yes.
Hon. Mr. Stevens: That would be in the Bank Act, Mr. Minister.
Mr. Mactrean: But his powers are almost unlimited.
Hon. Mr. Ross: I want to get at that. I want his limitations.
The Witness: I shall be glad to.
The Committee adjourned.
The Select Standing Committee on Banking and Commerce resumed at 4
o’clock p.m., Mr. Vien in the Chair.
The CHatrmMan: Mr. Pole will proceed with his statement.
Mr. W. F. Macuean: May I ask a question?
The CHAIRMAN: Yes.
By Mr. Maclean:
Q. I would like to ask the witness whether the State banks that are mem-
ber banks of the Federal Reserve Bank are subject to that system of inspection?
—A. They are subject, of course,—
Q. I mean subject to examination?—A. Yes, they are subject, of course, to
the examination by the State authorities; in addition to which the Federal
Reserve Bank may examine them at any time.
[Mr. John W. Pole.]
98 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Do you frequently do so?—A. It is frequently done. The Comptroller’:
bureau has no jurisdiction over State banks in any capacity. That is done by
the Federal Bank examiners. They may accept the State report of the examina-
tion.
Q. But the Federal Bank examiners may examine?—A.. The Federal Bank
examiners may do so. ‘
Q. Now, I would like to ask the witness whether any system of mere audit
by banks would effect what his National examination does?—A. Would you
please repeat that question?
Q. Would any system of audit by banks effect what your system effects, in
the way of examination? Would that be satisfactory to the public?—A. It would
not be satisfactory to the Comptroller.
Q. Or to the American public?—A. Or to the American public, because that
is a system of individual banks, and we go into a bank and make our own
figures and draw our own conclusions from those figures.
Q. Is it your opinion that your system of Federal examination has been
of great service to the public of the United States?—A. Undoubtedly; it has
saved many banks.
Q. And would you associate with that the rediscountmg by the Reserve
Bank System?—A. Yes, that has been extremely valuable to the country.
Q. The third thing ts, would you consider that a National Note currency is
also part of that National system?—A. Part of that National system.
By Mr. Hughes:
Q. Upon what system do the National Banks issue their credits? What
security is behind the notes that they issue?—A. The National Bank circula-
tion is secured by Government bonds solely. In fact, the National Bank System
was the outgrowth of an effort on the part of the Government to provide a
market for its bonds, in 1863, and the banks purchased the bonds; they deposited
them with the Treasury and issued circulation against them.
Q. To what extent?—A. To the extent of their capital.
Q. What percentage of the bonds?—A. To the extent of the bank’s capital.
By Mr. McMaster:
Q. But how many bonds did you have to have?—A. We could issue the
currency and bonds at par.
By Mr. W. F. Maclean:
Q. Is that a National Note Currency, or a currency of the banks?—A,
There is no bank circulation other than that. There is a 10 per cent tax on State
Bank circulation, which makes it prohibitive, and that is entirely gone.
By Mr. Hughes:
Q. Some few years ago, if I understand the system correctly, the banks
issued their own notes up to 90 per cent of the par value of the Government
bond?—A. That was many many years ago, sir; that was in the earlier stages,
in the sixties and seventies.
Q. I think it was later than that; I think that system was followed later
than that?—A. Perhaps it was later than that, but it is a number of years
since that system was in vogue, quite a number of years.
Q. What is the system now?—A. The system is that they may issue circula-
tion against Government bonds at par.
Q. Up to the par value of the bonds?—A. Up to the par value of the
bonds.
Q. But the banks issue their own notes?-—A. Yes.
[Mr. John W. Pole.]
BANKING AND COMMERCE 99
APPENDIX No. 1
By Mr. W. F. Maclean:
Q. Is there no mark on those notes in the United States?—A. The form is
prescribed by the Government. The Government has its own name on the
notes, and they are furnished by the Government at the expense of the bank.
Q. And the Federal Government knows exactly the amount of that issue?—
A. Oh yes.
By Mr. McMaster:
Q. The issue cannot be greater than the capital of the bank?—A. Yes.
Q. And it must be secured dollar for dollar by Government bonds?—A.
Government bonds, which bonds may bear the circulation privilege. For instance,
two per cent Consuls, or Government Fours are the only bonds which have the
circulation privilege. All other Government bonds do not have it. For instance,
the Liberty issues do not bear the circulation privilege.
By Mr. Shaw:
Q. What do you mean by the circulation privilege?—A. You are not per-
mitted to deposit those bonds and issue circulation against them.
By Mr. Ladner:
Q. What was the proportion in the larger banks between the capital of
the banks and the liabilities to the public? At about what percentage did
they run?—A. I would say an average of about ten for one. In fact, it is a
sort of regulation of the Comptroller’s office, if a bank’s lability, if it’s deposit
liability becomes greater than ten times its capital, we advise the bank to con-
sider increasing its capital.
Q. I suppose you know that under our system the banks give returns
monthly in regard to their liabilities to the public?—A. Yes.
Q. They include practically all liability outside capital. Would the ten
to one you refer to include that class of liability?—-A. No, I would not say
so; that is, it is a deposit liability of ten to one.
Q. That is all classes of deposits?—A. All classes of deposits, yes. It
would not include liabilities for borowed money or anything of that kind. Of
course, that is not a fixed amount at all, that is merely the ratio which an
effort is made to maintain, that ten for one ratio. ;
Q. Would that be a sort of understood rule for all banks?—A. I am speak-
ing of National Banks.
By Mr. Hughes:
Q. In answer to Mr. Stevens you stated that you would be opposed to
the principle of banks guaranteeing each other’s deposits, that it had worked
out badly in the United States?—A. Yes.
Q. And for that reason, and perhaps for other reasons, you thought the
principle was unsound?—A. Yes.
Q. It was entirely limited in the United States to State banks?—A. Yes,
entirely.
Q. It was never tried in the National banks in the country?—-A. No, al-
though it has been advocated by various comptrollers.
Q. With respect to the State banks in the United States in which the
system was tried, could you give the Committe any idea, approximaely, of
the capital of those banks, say the lowest and the highest, or something of
that kind; to give us an aproximate idea of the capital of the banks that
adopted that system and found it unworkable?—A. Yes, I can; I can say from
a minimum capital of $10,000 to banks with a capital of $500,000.
{Mr. John W. Pole.]
100 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. That was a guarantee of all the deposits of all the banks?—A. Well
now, of course, the deposit law varies in the different States, you know. There
is no uniform deposit. guarantee law. For instance, the deposit law in Okla-
homa is one thing and the deposit law in Texas is another. In some States it
is possible for a bank to be a subscriber to that deposit guarantee law. It is
optional, whereas it is required in other States, you see.
Q. It is compulsory in some States and not in others?—A. Compulsory
in some States, and voluntary in others.
Q. I think you also stated that in your opinion it would be just as unwork-
able in respect to National banks as it was found to be in regard to State
banks?—A. I see no reason why there should be any difference, unless there
was some system of Government guarantee, which of course, would make that
guarantee absolutely sound. :
Q. That would be another thing—A. That would be another thing, of
course.
Q. Providing the guarantee was limited as to the amount, would it, in
your opinion, be as objectionable? Provided it was limited to—well, bring it
as small as you like so that it might protect the small depositors—would you
see any merit in that?—A. I am not an advocate of guaranteeing deposits at
all, but I think that Mr. Williams has made a study of that question. He is
to appear before you, and will probably have a good many statistics which
he can offer for the Committee’s digestion in support of these things.
Q. You think he could answer these questions better than you?—A. I am
sure he could, because during his encumbency as Comptroller of the Currency
he was an advocate of government-guaranteed deposits.
Q. I assume I may ask this question, which is really both a question and a
suggestion. The banking principles in the United States and Canada are not
comparable upon all fours?—A. No.
Q. We having the branch systems here, with a few large institutions?—
Bi oN Gee
Q. Whereas you have a multitude of small institutions?—A. Yes.
Q. And individual banks?—A. Yes.
Q. So that in many respects the systems are not comparable?—A. No.
We have thirty thousand banks.
By Mr. Ladner:
Q. Did the capital include—A. The surplus? No. I took it you meant
capital exclusive of surplus. If you want some definite figures on that I think
I can give them to you, if they would be interesting to include in the report.
Q. I think it would be interesting to the Committee if we had them on
record—A. If I file this report with the Committee it will be purely a question
of mathematics.
Mr. Lapner: I suggest, Mr. Chairman, that this report be filed.
Q. What did you say it dealt with?—A. “ An abstract of report of condi-
tions of the National. Banks.”
By the Chairman:
Q. What is the date?—A. It is dated February 5, 1924.
By Mr. Ladner:
Q. Now, the guaranteed deposits you have referred to, Mr. Pole, in cases
where a number of banks join together to guarantee all the deposits of all the
banks in that group. There was a joint and several liability?—A. Yes.
Q. In other words, one bank practically guaranteed the good business for
all the other banks?=-A. Yes.
(Mr. John W. Pole.]
BANKING AND COMMERCE 101
APPENDIX No. 1
Q. That has proven unworkable?—A. I would not say that. I would
not go so far as to say that. When you say “ guaranteed the good business ”
I presume you mean really guaranteeing the bad business?
Q. Both, guaranteeing it will be good when it. is not?—A. Yes. We have
in the United States a certain branch bank system—a chain system—
Q. Let us get it concretely. Where has that arrangement succeeded, if
any place, and is it now in operation?—A. Well, it is in operation, yes, where
a group of banks is acting under a Guarantee Fund. I have in mind a system
of banks comprising about one hundred and eighty-seven—
Q. Are they important banks, some of them?—A. No, they are all small
banks.
Q. They have made that union for the purposes of mutual protection?—
A. Ostensibly so.
Q. How has it worked out?—A. The banks are all alive and the Guarantee
Fund has something to its credit.
Q. Is that Guarantee Fund in the nature of an insurance fund?—A. The
banks are assessed so much.
Q. Is their assessment limited?—A. I think it is, yes.
Q. That is, each year they put so much into a fund and that fund stands
as a protection to take care of the depositors of any bank which might fail?—
A. That is correct.
Q. That scheme is now working and has proven successful?—A. There
still is something to the credit of that fund. In the case of the failure of one
or two of the members of that system, of course, the Guarantee Fund would
not go very far.
Q. That is not the point. It is the results I am speaking about. How
would you identify that particular group of one hundred and eighty-seven
banks? What do you call them?—A. That is a group of banks which extends
from New York to Florida.
Q. What do you call them?
By the Chairman:
Q. National Banks or State Banks?—A. National Banks and State Banks.
By Mr. Ladner:
Q. In telling your banker friends about them, what would you call them,
the—something—kind of a group.—A. I have made this comment on a particu-
lar system of banks. Is it necessary to mention the name of that particular
group?
Q. No, it is not. I only asked you with the idea that perhaps some of us
might care to read it up in the Library. If we want that information perhaps
we can get it privately from you?—A. I would be glad to do that.
Q. I submitted to the committee a concrete proposition which I will read
to you, and I would like you to comment upon it from your experience with
other systems:
“That in the opinion of this Committee the Bank Act should be
amended in order to provide for the establishment in the chartered banks
of Canada of a special savings account or other class of accounts for
savings deposits in addition to those now existing, whereby all holders of
deposits in such special savings account in any one bank, or branch
thereof, shall be protected or guaranteed against loss up to the sum of
$3,000 according to a similar principle as that now provided for in sections
62 to 69 inclusive of the Bank Act relating to the protection of bank notes
by the establishment of a fund known as the Bank Circulation Redemp-
tion Fund, or that such special savings account be established in accor-
(Mr. John W. Poley
102 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
dance with some other principle of insurance the premium of which
will be paid by the depositors or the chartered banks of Canada, or both,
or in such other manner as the committee may consider capable of giving
reasonable protection. to depositors of money in savings accounts in
such sums as the committee may determine.”
You will notice there is an important difference in the principle in this suggestion
from the general guarantee?—A. Yes, I see.
Q. In other words, the idea is to leave the existing banking institutions
as they are and simply establish for those who may have some concern about
the safety of the bank, and whose main incentive is protection, an additional
class of accounts to those which now exist?—A. Yes.
Q. And that account instead of drawing the present rate of 3 per cent, would
draw less than that; it might be 2.7, or 2.8, or 2.5, but the difference between,
we will say, 2.7 and the 3 per cent, or whatever figure would be fixed upon an
actuarial basis would constitute an insurance to the depositors by building up
an Insurance Fund to which the banks might also contribute an equal portion.
That Fund would be, to the extent of its resources, the protection of its depositors
who were greatly concerned with the safety of their deposits. Business men
engaged in large and important businesses, who know the solvency of banks,
would no doubt continue under the old system. Is there any such scheme as
that in operation in the United States?—A. Well, I know there are systems
which might protect the depositors up to that extent, but the scheme does not
contemplate that it might only reach to that amount.
q. It is limited to $3,000.—A. I see.
: Q. If you have more than $3,000, you are not protected for the excess?—A.
see.
Q. And you must put it into this special class of account, showing that you
have a motive for putting it in there for protection, thus giving the public that
amount of protection. Can you relate that to any experience in the United
States where a comparison would be useful in drawing a conclusion?—A. Of
course, it might be said that in a very large number of country banks the
probability is that the average deposit is very far below $3,000—
Q. But you know—
The Cuarrman: You do not give the witness time to answer.
Mr. Lapner: But I know what he has in mind.
Mr. SuHaw: But we don’t.
The CuatrMan: We would like to know what the witness has in mind, and
I notice that three or four times you have commenced to put other questions
before he has completed his answer.
Mr. Lapner: I did it with the idea of shortening the time.
Q. What were you going to say?—A. I was saying that in a very large
number of country banks the average deposit would not be over $3,000, so that
it would be tantamount to guaranteeing the whole line of deposits in that
country bank.
Q. Have you in mind the country banks of the United States or of Canada?
—A. Of the United States.
Mr. Lapner: That is why I interrupted, I thought he was speaking of that.
We could have saved all this time.
The Wirngss: I am not posted to any great extent on the Canadian banks.
By Mr. Ladner:
Q. We are trying, as for as possible, to apply this to the situation in Canada
where we have fourteen main banks, and under the Branch Bank System we
have four thousand, four hundred and forty-four branches, or did have a few
(Mr. John W. Pole.]
tae
BANKING AND COMMERCE 103
APPENDIX No. 1
days ago. Now, in a system like that where the deposits are changed a lot, and
much of the business is done with the larger offices, even from a distance, is your
experience sufficient to enable you to gauge the applicability of a scheme like
that to Canada?—A. I can see where it would operate entirely differently in a
large system of Branch Banking, from what it would under a system of indi-
vidual banks. We maintain that any sort of a guarantee of deposits fosters
“ wild-cat” banking; one bank is just as good as another, and that would not
be true under a system of branch banking.
Mr. McMaster: May I be allowed to interject a question, not to the witness,
but to the Chair? Has Mr. Pole finished his general statement?
The CuarrMaAn: That suggested itself to me this morning, but I noticed that
despite the fact that we established a rule whereby the witness was to make a
statement and finish it, it appeared to be the desire of the Committee that ques-
tions should be put, so I did not interfere. But if it meets with the approval
of the Committee I would urge that we let Mr. Pole finish his statement, and
then we could question him in such manner as may occur to the honourable
members.
Mr. McMaster: You laid down a rule, and we have all more or less broken
it, and I was wondering if it would not be well to re-establish it.
The CHatrMAN: There was another point of order which was suggested
to my mind. Mr. Ladner put a notice of motion on the Order Paper for this
Committee, on which there has been no discussion, and upon which there is in
my mind a question as to its relevancy, inasmuch as there is a similar motion
still under discussion before the House.
Mr. Lapner: I withdrew that the other day.
The CuHarrmMan: I did not know that.
Mr. Lapner: May I suggest, Mr. Chairman, that having maintained the
continuity so far I be allowed to finish. I will not take very long.
The Cuarrman: You may proceed.
By Mr. Ladner:
Q. I assume you understand our system of the Bank Circulation Retirement
Fund?—A. Yes.
Q. Do you think a scheme like that for accounts of $3,000 and under, under
our Branch System, could be worked out?—A. Under a Branch Banking System
I should say that it could.
Q. Now, we have had evidence that owing to certain conditions in Canada
—the Home Bank and others—deposits have been going from the smaller banks
to the larger banks, so that the four larger banks have approximately 70 per
cent of the deposits of the country, and the ten smaller banks have about 30
per cent, and these deposits, according to my information, are still continuing
to shift, while the overhead of the small banks continues. Do you think a scheme
like this would increase the confidence of the public in the smaller banks as
well as in the larger banks?—A. Well, I should say that it would tend to increase
the confidence in the smaller banks, by all means. I think it would also tend
to increase the confidence in any bank, perhaps, if they were assured that this
Guarantee Fund was a fund which would serve its purpose; I mean to say, if it
actually guaranteed. Of course, our experience with guarantee funds has been
that they do not guarantee.
Q. But take the group you spoke of a moment ago. How long has that been
in operation?—A. Quite a number of years.
Q. How many would you say, fifteen or twenty-five?—A. I should say
fifteen, yes.
Q. That is still operating successfully?—A. Yes.
(Mr. John W. Pole.]
104 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And the Insurance Fund is still there?—A. There is an Insurance Fund
there, yes.
Q. Is it not merely a question of the amount of insurance you have to
claim,—based upon experience—the amount of the premium you have to claim?
—A. Yes, it necessarily would be.
Q. And that is an insurance of all deposits, is it not?—A. Of all deposits.
Q. Is it not much more probable that where you insure deposits of $3,000
and under for those people only who select it—not for the people who leave
their accounts the way they are—that such a proposal as this would have a
much greater chance of success than the group you referred to?—A. I can
understand that that might be true, excepting that in the group I referred to
the Insurance Fund which is built up would be entirely inadequate to take care
of any material number of banks, should anything happen to them, so the mere
fact that the banks are still going, we will say, might be taken as evidence that
they will continue to go, but if they should meet with misfortune—any number
of these banks—it is very patent that the Insurance Fund would be a mere
bagatelle as compared with the amounts so guaranteed.
Q. There are people who believe that it would be in the public interest to
have a very small number—say four or five—of the large banks with branch
systems as against another system of more banks even though they be smaller
in capital and in deposit? Does your experience give you any conclusion on
that question?—A, I must say that I did not get that question clearly. ;
Q. Would it be better, for example, in Canada or the United States tha
there should be four or five very large banks which would control the entire
business of the country and others would not, through various reasons, be able
to or find it possible to start up. Would that system be a better one for the
country or would it be better to have a large number of banks?—A. Well, of
course, you are bringing up the very broad question of branch banking there,
= 7 ae a system of branch banking is preferable to a system of individual
anking.
Q. No, 4 or 5 large banks would have the system, too. The number of
branches would not be lessened, nor the service to the public?—A. In a country
which is operating under a branch banking system, I should say that the possi-
bility is that the strong towering institutions might perhaps be preferable to
some of those which were not so strong, but of which there were more. I do not
know, that is a matter upon which I cannot express an opinion.
_ Q. We have in Canada fourteen banks; in fact they are all large, compara-
tively speaking, to what they have in the United States?—A. Yes.
_ Q. But four are very much larger than the others. The question is whether
in your judgment, in view of your banking operations and serving the public
interest, whether in your judgment it would be better for Canada to have four
or five of those main banks with all the branches, or whether it would be better
a Hie the fourteen?—A. I would not care to express an opinion on that, Mr.
adner.
By Mr. W. F. Maclean:
Q. With your permission, and the permission of the Committee, I would
like to follow up something Mr. Ladner said. I want to ask the witness whether
it is a fact that the public of the United States to-day, who want to secure their
deposits can go to the United States Government and deposit their money in the
Government Savings Bank?—A. Yes, they can.
Q. And it is absolutely secure?—A. As secure as the Government.
Q. And the United States is the greatest financial power in the world to-day.
There is also another thing which I would like to have explained in two or three
words: we may get more of it to-morrow, and that is that American citizens
(Mr. John W. Pole.
BANKING AND COMMERCE 105
APPENDIX No. 1
can go into some branch of the National Reserve Bank or into the National
Reserve Bank itself and buy a certificate of deposit for a certain amount and
get—what per cent on that?—A. Four and a half per cent on that.
Q. He can get a Government certificate of deposit for any amount of
money ?—A. A Government Treasury certificate up to $5,000.
Q. On which he draws 44 per cent, and he can cash it at any time?—A. He
can cash it at any time, but he may lose a little on the interest.
" a He can re-deposit that money and check against it if he want to?—
. Yes.
Q. Any citizen of the United States can go there and buy a certificate of
deposit up to $5,000, but you have no system of Government deposits like we
nave, or like what we are supposed to have in this country, a Government Sav-
ings Bank independent of the Postal Savings Bank?—A. We have that, the
Postal Savings Bank and the Treasury certificates up to $5,000.
Q. And so far that has been satisfactory? How long has that been in force?
—A. The only way in which it has been unsatisfactory, Mr. Maclean, is that
it has caused a great many depositors in banks which were struggling along, and
in which there was not too much confidence, placed, to withdraw that money and
place it with the Government, and get what they thought was good security.
Mr. Kettner: I would move that the witness be allowed to proceed with
his statement.
The CuairMAN: I am sure Mr. Ladner will be in favour now.
Mr. Kettner: Surely the Committee is interested in getting the statement
of this witness now.
The CHairMAN: Will you carry on, please, with your evidence on the
system of inspection, as you started this morning.
The Witness: Mr. Chairman, I had about finished with regard to the
systems of examination which are in vogue in the United States. I have gone
over the report which the examiners make in detail, and I think that we stopped
about at the point at which the examination had been completed by the Field
Examiner, did I not? Now, after these examinations have been completed, and
the matters of criticism, matters of interest I will say, have been taken up with
the various Boards of Directors of these banks, that report is forwarded to
Washington, and is there analyzed by men who have had field contact; they
have had examining experience, and are in a position to visualize the situation,
because a report from a particular locality will reach the man who himself has
examined banks in that particular locality, so he knows precisely the local con-
dition, he gets the local picture from experience. After that is done he dictates
certain letters to the bank calling attention to what is wrong, to the Board of
Directors themselves it is addressed, and requires certain corrections to be made.
For instance, in the matters of excess loans or large lines of credit or habitual
granting of overdrafts, or an over-extended condition, or what-not, that letter
will be addressed to the Board of Directors and will be read by them at the next
regular meeting, and a reply will be expected addressed to the Comptroller as
to what action has been or will be taken in the way of making these corrections.
Now, if that is not done, that letter is followed up and if the criticisms are of
moment and corrections are not being made, an examiner is returned to the
bank; he may be returned to the bank to see what can be done to improve on
this condition. That is found very effective. That about covers the scope of the
examinations.
By the Chairman:
Q. Have you anything else in your statement that you think would be of
interest to the Committee?—A. I did think that possibly 1 should like to file
{Mr. John W. Pole.]
106 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
with this Committee a copy of the Comptroller’s Annual Report with reference
of branch banks, which I think will be of interest.
Mr. Mariner: Mr. Chairman, I would like to ask the witness some ques-
tions when you are quite ready.
Mr. Hugues: There are some questions I would like to ask on some points
the newspaper reporters did not get quite clearly.
By the Chairman:
Q. What is the date of that report of the Comptroller?—A. This report is
of December 3rd, 1923.
Document filed and marked EXHIBIT No. 5 (Not printed).
The Wrrness: It is of particular interest, because this question of branch
banking involves the existence of the Federal Reserve System, and I am quite
sure that would be of interest in the report.
By Mr. Ladner:
Q. In what way?—A. For the reason that so far as the State Banks are con-
cerned it is a voluntary membership, but in the case of National Banks it is a
forced membership, and upon the Federal Reserve System depends the member-
ship of the National Banks, and if the Branch Banking Bill and these other
provisions of the McFadden Bill had been passed, the probability is that a
great many of the National Banks would go out of the system, and go into
the State system, and inasmuch as there are only 1,600 banks out of 20,000
which are voluntary members of the system, it is probable that a great many
of those National banks which would go out of the system would probably not
become members, and would imperil the system.
By the Chairman:
Q. Do I understand you to say that you prefer the Branch Banking System
to the Federal Reserve System?—A. It is a question of establishing branches of
National Banks, being allowed to establish branches in competition with State
banks. At present National Banks are not permitted to establish branches.
Q. How would they be compelled to go out of the Federal Reserve System if
they established their branches?—A. Because the Federal Reserve System does
not permit branch banks hereafter.
By Mr. Coote:
Q. It does not permit branch banks to belong to the Federal Reserve
System?—A.Yes, hereafter. Of course, I do not mean branches within the city
in which the parent organization is located.
By Mr. Hughes:
Q. You stated this afternoon that there were 12 examining districts in the
United States?—A. Yes, Mr. Hughes.
Q. And you stated there were a number of examiners and assistant examiners
in the United States?—A. Two hundred and fifty examiners and about the same
number of assistants. There are about 250 or 260 examiners including the 12
chief examiners.
Q. And 250 assistants?—-A. Two hundred and fifty assistants.
By Mr. W. F. Maclean:
Q. And a lot of clerks, as well?—A. Yes.
Q. They are the experts of the profession so far as banking is concerned?—
A. These examiners are selected from men who have been very successful as
bankers, officers, junior officers in banks, and the assistants are from the clerical
departments of banks.
[Mr. John W. Pole.]
BANKING AND COMMERCE 107
APPENDIX No. 1
(. And they are fairly well paid?—A. The Government is not noted for its
large salaries; the salaries run in the case of examiners, from about $3,000 to
$20,000 a year, and in the case of assistants from $1,500 to $3,500.
By Mr. Hughes:
Q. May I ask one more question? Is it customary in the United States for
the banks to allow customers overdrafts to any appreciable extent?—A. It is not
anything like so much so as it was; it was quite prevalent before Mr. Williams’
administration, but he was very much down on overdrafts, and they are now
very much curtailed.
Q. What proportion would they bear?—A. A very small proportion.
Q. To the commercial paper discounted?—A. Oh, nothing. For instance, on
this date here, December 31st, 1923, out of 8,184 banks, the loans and discounts
amounted to in round numbers eleven billion eight hundred million, whereas the
overdrafts amounted to ten million.
Q. What date was that?—A. Last year. Last December.
By Mr. Marler:
Q. Mr. Pole, your examination this morning very largely related to the
question of inspection of banks or Government authority. The evidence, I think,
which the Committee desired to bring out was the possibility of applying a
Government inspection to our banking system here in this country. Now, you
told us the organization of banking inspectors, and you brought us up to the
point as to what happened when these inspectors went into a bank. You told
us, I think, that the inspections were at irregular intervals, which meant that
these inspectors would go into a bank at any time they wanted to, without previous
warning. Now, when these inspectors arrive at a bank, let us take the one you
mentioned this morning, the National City Bank in New York, what do they
call for first of all or do they simply say, “ Hand over your books, we want to
examine them ”?—A. They do not put it just in that language, but that is what
it means. Of course, when you talk about the National City Bank of New York,
you are talking about a colossal institution there, which would hardly be a
guide; it is almost a law unto itself. Where there are a few immense institutions
like that in New York, there are 500 institutions of half a million dollars capital,
you know. When an examiner walks into a bank his arrangements are made
before going there, to place his assistants in each one of the departments, and
he takes absolute charge of each one of these departments as soon as he enters,
and he seals the securities and takes charge of the note portfolio, and he seals
the cash and takes everything under his charge, and releases it as best he can,
having in mind the idea of inconveniencing the bank just as little as possible.
Q. You are aware, of course, as has been pointed out to you, that we have
in this country some very large banking institutions with which you are prob-
ably familiar. For instance, we have the Bank of Montreal, the Bank of
Commerce, the Royal Bank, and the Bank of Nova Scotia; those are four very
large banking institutions in this country, all having very numerous branches.
—A. Yes.
Q. The point I wanted to try and get at as a starting point is this: these
bank examiners in the United States do not call for any particular statement
which has been prepared for that bank and examine that statement and check
that statement, or do they make up an entirely new statement for them-
selves?—A. The statement which they would work to would be the statement
as of the close of the business of the day in which they entered the bank.
That is, they would take that general ledger statement. If they went into a
bank on Friday afternoon, for instance, at the close of business that day, after
their statement had been made up, that would be the statement to which they
would work.
1—20
[Mr. John W. Pole?
108 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. In other words, they would take a statement prepared by the interior
officials of the bank as a basis of accountability?—A. Yes, but checked back
by the examiner as to correctness from the general books, of course.
Q. Now, in going from that statement, that statement would have the
usual banking items in it; loans, discounts, real estate, and the hundred and one
various items you get in any statement of a bank on any day of the year at
all—aA. Yes. :
Q. They take that statement, the bank examiners, and verify it by the
books and first of all find that that statement as a statement of figures is cor-
rect. Do they go this far? Do they look further into the various loans in any
particular item and verify if those loans are good or bad insofar as the collateral
security behind them is bad or good?—A. Yes, that is the principal reason for
the examination. The other, one would really regard as in the nature of an
audit of the bank, whereas we bank more particularly upon the examination
which is the careful examination of each particular loan in that bank, and of
each particular asset as to its real value, and when that note portfolio is taken
it is probaly taken up——to give you a concrete illustration, those notes are
sent up to the Directors’ room where there is a foree of men who go over those
notes piece by piece, and they will make up what we call “Line Sheets,” which
is to say they will go through all these notes, and when they come across
“ Jones” he will go down, and when they come across “Smith” he will go
down, and again when they come across “ Jones” he will go down on that sheet
again, so by the time the entire portfolio has been exhausted the examiner will
have a complete line of all the important loans in that bank, and on top of that
these loans will be checked up to the Liability Ledger, so as to be sure the lia-
bility will agree with the actual loans which he has received. After these loans
have been lined up in that way, the credit statement will be read, and all credit
information will be obtained, and that loan will be thereby dubbed as “ satis-
factory ” or it may be “slow” or it may be “ doubtful” or it may be regarded
as “loss” or “part-loss,” and it is there, it is in that very particular phase in
which the examination of the Comptroller’s Department is of real value.
Q. In other words, if there is a million dollars worth of loans, any particular
item composed of one hundred items, each one of these is examined and actually
placed in this report at its real value?—A. Oh, yes.
Q. So that million dollars is a real asset?—A. Yes.
Q. There is nothing fictitious about it. Likewise the commercial loans
on large assets will each be examined?—A. Yes, that is the intention.
Q. To see if the real value is behind each commercial loan. Likewise,
I suppose the loans on securities are examined in precisely the same way?—A
Exactly.
Q. And the same with the assets held by the bank; the whole statement
taken together as the real examination of the assets behind that statement?—
A. Yes, that is precisely it.
Mr. Maruer: I think that is very valuable information.
Witness: We differentiate between what we call the audit and what we
call the examination. The audit deals more with the correctness of figures,
whereas the examination deals with the value of the bank’s assets.
Q. You have a verification of the assets and liabilities of that bank, and
when the State bank examiners get through with it, it is absolutely a veri-
fication that those securities and liabilities are as shown?—A. As far as the
ability goes to make that investigation.
Q. Previous to the revision of the Bank Act in 1913, our banks had what
you would call in the United States, and what we call here, the usual interior
~ audit; that is to say, an audit by officials of the bank. Their chief inspectors and
-Mr. John W. Pole.]
as
>
BANKING AND COMMERCE 109
APPENDIX No. 1
sub-inspectors go to the various branches, examine them, turn into the head
office a return which they have certified as correct—A. Yes.
Q. In 1913 there was an audit imposed on that. Two auditors were named
by the shareholders who went into the affairs of the bank also?—A. This is
under your Canadian system?
Q. Yes. I am simply explaining this in order to ask you a question. When
the revision of the Bank Act took place in 1923 that outside audit which as I
have explained was inaugurated in 1913 was also kept on with some amend-
ments, the principal amendment being that one of the auditors would be more
or less permanent, while the other auditor would belong to a different firm and
would change as time went on. Therefore, we have an interior audit of our
banks, and in addition, this exterior audit of our banks. Now, the suggestion
which the Committee is considering—a very wise suggestion too—is that we
have a further inspection, or Government inspection of banks. That would
mean, so to speak, three various audits. You explained to us this morning the
organization which the State bank officials have as regards the inspection which
they make, and I think you told us that there was a considerable number of
high officials, and a good many other officials necessarily of s lower type—a
somewhat expensive matter, I should imagine to carry out, likewise, if applied
to this country a more or less expensive matter to carry out. Now, where your
State examiners do carry out a system of inspection as you have explained,
would a situation like this appeal to you at all—to have a smaitl Board here in
Canada of comparatively few bank examiners, and have attached to that Board
the auditors as now nominated under the Bank Act, for the purpose of making
this exterior audit of the bank affairs. Do I make my question sufficiently clear
to you?—A. Yes, I think it would be impracticable for you to maintain a force
large enough to make an examination of your banks and all their branches simul-
taneously; and unless you could do so, a large part of its value would be lost.
But it has occurred to me that the system which is in vogue here now is really
a splendid system, largely for the reason that I read in your Act that those
auditors shall be men of the very highest stamp, so that you can rely on whatever
report they make, people like Price-Waterhouse, and Chartered Accountants of
high reputations.
Q. Quite so. I might interject Mr. Pole, for your informaticn that instances
have occurred where those audits have not proved to be entirely satisfactory ?—
A. I quite see that that could be in certain cases. Of course, I presume that
would not happen very often if the matter were put in the hands of responsible
accounting firms.
The CuHarrman: That was prior to the change in the Bank Act last year.
Witness: Your system of auditing contemplates placing it in the hands
of a select list of auditors, does it not?
Mr. Marurr: Yes, it does.
The CHAIRMAN: Since last year.
Witness: It does now?
The CHartRMAN: Yes.
Wirness: So that would preclude aimost the possibility you mentioned,
that a report might not be reliable. It strikes me that with the large number of
branches that you have, it would be almost impossible for you to maintain a
force that could make this simultaneous examination. But if you continued these
audits by those responsible accounting firms, and in addition to their regular
work of accounting, you outlined to them a report similar perhaps to the one
which I presented to you—that is in part—so that it would cover an analysis
of the loans, an analysis of the value of securities, and that sort of thing, and
(Mr. John W. Pole.]
1—203
110 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
those reports were sent to this office, and there was in this office a co-ordinating
head for the purpose of tabulating those reports, and then perhaps taking those
matters which to his experienced eye might appear to require attention—take
them up with the bank directly and see that the correction was made, it might
be certainly less expensive and perhaps just as satisfactory as having your own
force.
Mr. Huaues: I think Mr. Marler mentioned State banks where I think he
meant National banks?
Mr. Marter: I meant National banks.
Witness: The State departments do not maintain the high class of exam-
ination that the National banks do; that is generally understood.
By Mr. Marler:
Q. The trend of my question is this: Notwithstanding any amount of
examination by experienced men like yourself or by others we must get down to
some practical viewpoint as to how a matter of this description can be worked
out to the advantage of the banks and of the community in general. That is
the reason I am asking you these questions in this manner?—A. Yes.
Q. It occurred to me to ask you if you did not think that the continuation
of the present audit system that we have under our Bank Act, coupled with a
small board of supervisors, very experienced men, exceedingly experienced men
who would carry out such directions as the Central Board gave, examined the
securities and matters of that description, would not fulfil really the same func-
tions as your board of examiners fulfil—A. In a very large measure, I think
it would. In fact, I think it is really the only practicable way in which this
examination of a bank with a large number of branches could be accomplished.
Q. In other words, under our branch system of banking, you think that to
immediately set to work to have an entirely new examining board would be
hardly practicable, and hardly as advantageous as leaving the present system
in vogue and super-imposing another and smaller board?—A. Yes, I think that
would be effective. I think further that out of this board, which you speak of,
would undoubtedly grow certain schemes which would show the necessity for
calling, perhaps upon each individual branch to report direct to this head office
in reports from which might be tabulated valuable information—I mean direct
to the board, not to the bank itself.
Q. The danger might occur to you to this extent—perhaps it will occur to
other members of the Committee though it does not occur to me—that those
auditors at present acting under the Bank Act might possibly be influenced by
officiuls of the bank?—A. Under your present system, of course, that is always
a possibility.
Q. Would that possibility appear to be of considerable importance to you?
—A. Under your system of rotation—I think I might call it rotation—where a
bank is only examined under certain restrictions under the law, I should think
there would be very little. It strikes me that that has been removed, as far as
it is possible to remove it.
Q. And would not such examination, as we have described in the last few
minutes, that is to say, the present audit and some others, be far more useful
than trying to put an entirely new system into vogue?—A. I should say it
would be just as adequate as it could be made, and preferable.
Q. May I repeat my question again; would it compare very favourably,
if not be equal to your system of bank examination?—A. So far as the two
systems are comparable. Of course, you can hardly compare a system of unit
banking with a system of branch banks. We would not take the Chase Bank
(Mr. John W. Pole.)
BANKING AND COMMERCE 111
APPENDIX No. 1
for instance, or the City Bank and examine the parent bank to-day, or this
month, and then spring to its other branches as we happen to get to them. We
would cover the parent bank and every one of those branches at the same
moment, and we would compile our figures so that there would not be any
interchange of securities, no possibility of unloading others, or interchanges
of any kind. Outside of that, I might say yes.
Mr. Marurr: Mr. Chairman, it was suggested that we might at some time
discuss the guarantee of deposits. Is it your wish that that matter be taken up
now, or should it be postponed.
The CHairMAN: When we stopped putting questions in respect to the safety
of depositors it was because we wanted Mr. Pole to complete his statement. I
understand that he has completed his statement.
Witness: I think so.
The Cuarrman: Any other questions?
By Mr. Shaw:
Q. Mr. Pole, what is the purpose that the United States Federal Govern-
ment has in imposing this system of inspection upon the banks?—A. Primarily,
that a safe place may be offered to the depositors.
Q. So, I take it then, that the object of inspection is to protect the depositor
primarily ?—A. To protect the depositor, primarily.
Mr. W. F. Maciean: You mean the examination?
Mr. Suaw: I am using the words “ examination ” and “ inspection ”’ as inter-
changeable or similar terms.
By Mr. Shaw:
Q. Now, in the event of a failure of an inspected bank, of a bank subject
to Government inspection, is there any financial responsibility on the Govern-
ment in favour of deposits?—A. None at all.
Q. Does it occur to your mind that if the Government adopts every adequate
safeguard, including inspection, there should be any extension of that Govern-
ment’s responsibility in favour of deposits?—-A. Absolutely none.
Q. On the other hand would it be fair to say that if the Government does
not provide every adequate safeguard, including inspection, then, and then only,
will arise the question of Government responsibility for loss in deposits?—A. I
think the Government would be subject to some censure if it neglected its duties.
Q. Any responsibility that may be due for payment would devolve only
in the event of failure to inspect?—A. Yes.
Q. In the course of your interesting statement this morning, you took us
to the point where the Comptroller of Currency, as the result of reports made
to him, communicated to the directors, and urged certain action in the interests
of the bank. Now I want to ask you, what power has the Comptroller of Cur-
rency, if he has any power, to close a bank and stop it taking further deposits?
—A. He has absolute power, provided the bank, in his estimation, is not solvent.
Q. That is, I understand— —A. That is indisputable.
Q. Acting on his own discretion, the Comptroller of Currency can step in
and close a bank at any time?—A. At any time.
Q. Can you tell me what proportion of the banks to which you referred
this morning as having failed were closed in that way by the Comptroller of
Currency, approximately—A. Closed by the Comptroller of Currency?
Q. Yes.—A. I would say a very, very small percentage of them were.
Q. What invited the closing of the bank; was it action by the creditors?—
A. The probability is that in the case of a bank being unable to continue, it is
usually the directors who close their own banks. We throw that onus on them,
[Mr. John W. Pole.]
112 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
and make them close their own bank as a general thing. I think, in fact, it is
done at the instance of the examiner, but only when in agreement with the
directors that it is the best thing to do to close the bank.
Q. So I judge from your remarks, Mr. Pole, that in pursuance of his power,
the Comptroller of Currency recommends to the directors the closing of the
bank, and they take that action, fearing, of course, that he will follow up his
advice?—A. That is correct. Of course, the Comptroller does not want to close
a bank so long as it is a safe place at all for the deposit of money. Of course,
he tries to avoid closing a bank; indeed, it is a very, very difficult thing to
determine as to the solvency of a bank, particularly in those localities where
those 57 banks have closed, because they are in agricultural sections, and the
lines of credit to those people are just almost guess-work, in a large measure.
Of course, you know what those agricultural districts are like. They are exactly
like the agricultural districts in Canada where a depression has been felt by
the banks, and values have declined, and deposits have declined, and perhaps
the bank has got down to where it cannot borrow any money; it has perhaps
borrowed already too much, and it has no other place to go, and it is closed.
Q. Suppose that as the result of those reports to the Comptroller of Cur-
rency it is found that the capital of the bank is impaired; what would the
Comptroller of Currency do under such circumstances?—A. Of course it would
depend a good deal upon where the banks are situated and what were the con-
ditions surrounding it, but assuming normal conditions, the Comptroller would
then issue an impairment notice against that bank.
Q. What would that mean?—A. He would inform the directors that it was
necessary to re-establish the capital of that bank which, according to the report
of examination, was impaired, we will say, 50 per cent, and the directors would
then serve a notice on the shareholders that in accordance with the by-laws it
would be necessary for them to meet within thirty days to arrive at a deter-
mination as to whether or not they should pay this assessment or whether they
should go into voluntary liquidation, the bank having only an impaired capital,
and not being insolvent.
Q. The shareholders then would have that alternative?—A. Yes, the alter-
native of meeting the assessment or voluntarily liquidating the affairs of the
bank.
Q. In other words, I take it, the direction of the Comptroller of the Cur-
rency to the shareholders is this, “ Either repair the impairment or go into
liquidation ’?—A. That is correct.
Q. Now, supposing that it should appear from the report of the Comp-
troller of the Currency that dividends have been declared, which dividends
impair the capital of the bank, what would the Comptroller do, with the power
vested in him, under such circumstances?—A. Of course, a dividend may not
be declared unless first of all ten per cent of the net earnings of the period have
been passed to the Surplus Fund, and that the bank has deducted all bad debts
and all losses of any kind, and if this has been done and it still cannot declare
a lawful dividend, the shareholders may have to reimburse at the instance of
the receivership, should the bank go into a receivership.
Q. But I suppose the Comptroller of the Currency would also have the
right to direct that the shareholders be called upon to pay back the dividend
already paid?—A. Yes, he may do that.
Q. In other words, I take it from your excellent statement of this morning,
Mr. Pole, that the Comptroller of the Currency is vested with almost unlimited
power?—A. Very wide powers.
By Mr. McMaster:
Q. A sort of financial god?—A. He is.
[Mr. John W. Pole.]
BANKING AND COMMERCE 113
APPENDIX No. 1
By Mr. Shaw:
Q. In the event of the insolvency of a bank, does the Government, if it has
any funds on deposit in the bank, have any priority, or does it share as a com-
mon creditor?—A. It shares as a common creditor, but it must be remembered
that all deposits of Government funds are secured by satisfactory collateral,
which may be passed on by the United States Treasurer.
Q. The Government does not deposit its money— —A. On open account?
Q. On open account?—A. It does not.
Q. And it stands in the same position as the other creditors?—A. The
same position.
Q. And has no priority, by law?—A. None at all.
Q. Would you think, as an expert on these matters, that the giving of
priority in our country to the Dominion Government, and the provincial gov-
ernments, as is the fact, would hereby work to the detriment of depositors in
the event of insolvency, where our Government deposits are in open accounts?
—A. In the event of the open account, I would say it would, but the way it is
handled in the United States it would make no difference, because the Govern-
ment has no preference, and claims none. It does not want preference because
it has the security.
Q. Does that same principle apply to the various states?—A. It does not.
Q. The state governments have priority?—-A. They have, as a usual thing.
There is usually quite a list of grades where they come in as creditors.
Q. I take it that the state governments, in the event they have deposited
on open account, have priority to the extent of their account?—A. That is true
in some states, if, indeed, it is not in all of them.
Q. That is true by all virtue of the state laws of the various States?—A. Yes,
by virtue of the state law. In the State of Georgia, for instance, I happen ts
recall that the State comes first, and then other governmental funds, I think
the county funds and the city funds, and next to that the United States Gov-
ernment funds, and then certain savings deposits, and then open accounts.
By the Chairman:
Q. That applies only to State Banks?—A. It applies to this particular
state, which I have in mind, which is the State of Georgia.
Q. But it applies to State Banks, not to Federal Banks?—A. Not to the
Federal Government.
By Mr. Shaw:
Q. But it makes no difference because the Federal Government only
deposit on security.—A. Yes.
Q. I want to ask you one or two questions in connection with the applica-
tion of this matter of inspection in Canada. As has been suggested the banks
have an inspection system of their own—A. You mean an internal audit?
Q. Yes?—A. Yes.
Fs Q. Then we have the shareholders’ audit—all paid for by the bank?—A.
es.
Q. The secret of your inspection in the United States, as I take it, is that
it is entirely independent of the bank—paid for by the Government?—A.
Paid for by the bank.
Q. In what way?—A. Assessment.
Q. You mean by taxation?—A. Assessment.
Q. Based on what?—A. Based on the total resources.
Q. What you do, Mr. Pole, is to find out the total resources of all the
banks of the United States, and you pool those resources and assess the banks
in proportion to those resources?—A. That is really what it amounts to,
[Mr. John W. Pole.]
114 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
because the bank, as a matter of fact, is assessed fifty dollars on its first
$25,000 of assets, and three cents per thousand on its total resources thereafter.
Q. So, it is in effect a form of taxation?—A. Yes, a form of taxation.
Q. But the inspecting staff are employed and paid by the United States
Government?—A. Yes.
Q. They do not get their pay from any of the banks?—A. No, not now.
By Mr. McMaster:
Q. They formerly did?—A. Yes.
By Mr. Shaw:
Q. Now, with regard to inspection, it was suggested last year that we
should have in the Department of Finance an auditor, or inspector or bank
commissioner—call him what you like—who would be in a position to contro!
not only the bank’s auditors and bank audits, but could standardize the audits,
who could call for other and further returns than those already required under
the Bank Act, and would have the right, if he saw fit, to go into any bank in
Canada, or any branch of any bank in Canada, and make a thorough inspec-
tion?—A. Yes.
Q. Now, do you think that the imposition of such an official as that, a
permanent government official charged with this one duty of bank auditing,
and this one duty alone, would be a satisfactory and secure addition to make
to our present inspection system?—A. I think it would be a very valuable
addition.
Q. And would furnish a further safeguard than we have at the present
time?—A. Decidedly so. I think, of course, he would not accept these audits
necessarily as they are, but would go beyond that and require them to furnish
certain other things from which he could compile his reports.
Q. And have the right to go in and make an examination himself?—A.
And would have the right to go in and make an examination himself, where
he thought it necessary.
Q. And especially along the line suggested by you to make an actual
appraisal of the assets, to his own satisfaction?—-A. Yes, I had that in mind
when I said he should require other schedules than those which are perhaps
now in force, and I had particular reference to the valuation of the bank’s
assets, which I regard as a very, very important thing, if not, indeed, the most
important.
Q. There is one further question I want to ask you, Mr. Pole. I want to
inquire as to whether or not the Federal Reserve system of the United States has
increased the safety of depositors?—A. I do not like to hesitate on that question,
but I would say, indirectly, yes by all means. In this way: if I may enlarge on
that—
Q. Yes, just explain it?—A. It gives the bank access to funds which it
perhaps would not have otherwise from its correspondents to enable it to work
its way along pending a better condition of things, and to keep on as a going
concern where otherwise, if it might be at the end of its resources, it would
have to close.
Q. Is it not true that prior to the application of the Federal Reserve
System—
The Cuatrman: The witness will be here to-morrow, and this question,
Mr. Shaw, is under advisement on a question of order,—
Mr. Suaw: If I may interrupt, Mr. Chairman, the point there, as you will
recall is that when the matter was taken under consideration by yourself it was
suggested that pending your decision we should have an opportunity to cross-
examine any witness.
(Mr. John W. Pole.]
BANKING AND COMMERCE 115
APPENDIX No. 1
The CHarrMaAN: That is quite true, and that is why I did not like to
interfere, but I would draw your attention to the fact that Mr. Pole has come
to us voluntarily, and has been on the witness stand for almost three and a half
hours to-day. We will have the pleasure of listening to him again to-morrow,
and as it is 5.35 now, I would suggest, if it is your pleasure, that we adjourn
now, and Mr. Shaw will have the first opportuntiy of continuing his questions
in the morning. In the meantime I shall go into this matter of order, and will
endeavour to give my decision to-morrow morning in regard to your motion,
but even if the other matter be set aside, I think there is no doubt but that
questions put to the witness regarding the relation between the establishment of
such a system and the safety of depositors, would be entirely relevant.
Witness retired.
The Committee adjourned.
CommiTrre Room 429,
House or CoMMons,
Wednesday, May 21, 1924.
The Select Standing Committee on Banking and Commerce met at 11
o’clock a.m., the Chairman, Mr. Vien, presiding.
The CuatrMAn: Notices of motion.
Mr. Garland moves:
“That schedule G of the Bank Act with the caption ‘assets’ be
amended by adding thereto the following items:—
‘Appropriation account, contingent reserves, undistributed profits.’ ”
This will le on the table and will be printed in the proceedings to-morrow.
I would suggest that other notices of motion be left over until to-morrow morn-
ing, because to-morow we will have more time to consider them. Mr. Williams
is to be here to-morrow, but will not reach Ottawa until a quarter past one
o’clock. He will not, therefore, be here until 2 o’clock. I would therefore sug-
gest that we meet to-morrow at 11 o’clock a.m. for routine business and notices
of motion, and then adjourn until 2 o’clock.
Mr. Gartanp: There is a matter which I desire to bring to the attention
of the Committee. Probably as you know, Mr. Chairman, the public are in-
terested as perhaps never before in banking reform, and I have had several
requests for copies of the proceedings, and I understand that other members
of the Committee have had similar requests. Last year, there was available
a large number of copies, and there was no shortage. This year, I find un-
fortunately, that there is. I give it as my personal opinion that the public are
interested in these things and should certainly be satisfied. I would therefore
move, that a sufficient number of copies of the proceedings be printed for dis-
tribution to enable members of the Committee to supply their correspondents
with copies as required.
The CuairMan: Would you tell us the number required?
Mr. Garuanp: So far as I am concerned, I can; but I cannot speak for the
other members of the Committee.
The Cuatrrman: Authority has been given for 600 copies. There are 235
Members of the House of Commons, and 96 Senators, and allowing for some
other copies, I understand there is at present available about 100 copies.
(Mr. John W. Pole.]
116 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Gartanp: That is what I understood.
The Cuamman: What the number required would be, I do not know, but I
do not believe there would be any objection to having 100 copies additional.
We would have to explain the matter to the authorities of the House, however,
and I would like to know what the requirements would be, if possible.
Mr. Coote: Would the Clerk tell us what number was used last year?
The CrerK: The Committee started with 800 copies, which was increased to
1,000.
Mr. Coote: I suppose they were all used?
The Cierk: They were practically all used?
Mr. Spencer: I think we should have as many this year. I know I have
had calls for a good many copies and have been disappointed in not getting
the number J required.
The CHatrMAN: IJ will communicate with the Speaker who rules these
matters, as head of the Commission of Internal Economy, and endeavour to
obtain for the Committee what hon. members are requesting now.
Mr. CuHevrier: Suppose you place at the disposal of every member of the
eee Nie, ten copies. Those who did not want them could leave them for
the others.
The CuarrMAN: That might be a good ‘suggestion, but I suppose some
members of the Committee would not require ten copies, while others might
require more. If members of the Committee would advise the Clerk as to
the number of copies they require we might be able to make a fair distribution.
I shall advise the Committee this afternoon or tomorrow what I have been able
to obtain after consulting with the Speaker, and I shall endeavor to procure for
the Committee what is requested.
Mr. Coote: There is another matter that I would like to bring to the
attention of the Committee. We have had three distinct matters referred to
this Committee. There is first the question of the Home Bank and the changes
in the Bank Act for the safeguarding of depositors. Next there is the question
of rural credits which has been referred to this Committee by the House of
Commons. As yet, the Committee have not had time to consider that question
and have taken no action in regard to it.
The CuHarrMAN: You mean the Tory report?
Mr. Coors: Yes, Dr. Tory’s report... I may say that I met Dr. Tory
yesterday, and I took occasion to ask him when he would be in Ottawa again
because I thought the Committee might possibly wish to ask Dr. Tory to come
before it and be examined in regard to his report. Dr. Tory told me that he
was leaving Ottawa yesterday afternoon and his secretary has sent me the
following memo:
“T am directed by Doctor Tory, to inform you that he has left
Ottawa this afternoon to be absent until May 27th. He then expects to
be here during the rest of next week and probably also on June 2nd, after
which he will again be out of the city for several days.”
I was going to suggest to the Committee that we call Dr. Tory possibly
next Wednesday or Thursday, or possibly Wednesday and Thursday.
The CHatrMaAN: I understand that Thursday is a holiday, but we could
probably arrange to have Dr. Tory some time next week.
Mr. Coors: I would like to know if the Committee would be agreeable to
devote two days of next week to this very important matter. So far as Western
Canada is concerned, there is no more important question than that of rural
credits, and I would not like to see it delayed too long.
BANKING AND COMMERCE 117
APPENDIX No. 1
The CHarrmMan: I grant that there is much in what the hon. gentleman
has said, but the first order of business before the Committee is the question
of the Home Bank; and if it is agreeable to the Committee, when we are through
with Mr. Williams, I would not object at all to hearing Doctor Tory if he is
available. I do not think it will disturb very much the deliberations of the
Committee if next week we fix a date on which to hear him.
Hon. Mr. Srevens: He is to be absent until May 27th.
The CuHairMan: Next week, I think there will be no difficulty in hearing
Dr. Tory. I may say that I tried yesterday to obtain for the members of the
Committee printed copies of Dr. Tory’s report. Some mistakes have been
made in the first printing, and it had to be returned to the printing office.
We expect that it will be available for distribution to-day or to-morrow, and
copies will be distributed to the Committee, and the Committee will be in a
position, after we have heard Mr. Williams, to determine what would be the
most suitable day next week to hear Dr. Tory.
Mr. Warp: Will there be any additional copies of Dr. Tory’s report
available other than what has been ordered? I have had numerous requests
for copies.
The CHatmRMAN: Dr. Tory’s report is a return of the House, and copies
must be asked for at the distribution office. 100 copies have been allotted to
the Committee, and I may say that 200 copies will be sent to the Committee
for use of the members. If hon. members desire additional copies they should
address themselves to the chief of the distribution office.
Mr. Warp: I did so, and was unable to get any more copies.
The CHatrMAN: Then your only recourse would be to address yourself
to the Speaker.
Mr. THurston: I may say as a member of the Printing Committee that
we ordered this report to be printed.
The CHatrMAN: The question is mainly as to the number of copies
available.
Mr. Tuurston: I think 500 copies are distributed to members of the
House.
Mr. Coots: I would like to know if we can take it for granted that the
Committee will arrange to call Dr. Tory next week.
The CHatRMAN: Will you make a motion to that effect?
Mr. Coote: I will make a motion to that effect.
Mr. SHaw: I will second it.
The CHatrMaNn: It would be much simpler if you moved that Dr. Tory
be requested to appear on a day to be fixed next week.
Mr. Coors: I will move that.
The CHarRMAN: Wednesday?
Mr. Coote: Wednesday, if possible.
Motion agreed to.
Mr. J. W. Powe recalled.
Mr. Suaw: Before proceeding with Mr. Pole’s evidence I would like to
make a suggestion. Would it be possible for the witness to give us a fifteen-
minute or twenty-minute talk on the Federal Reserve System, outlining, perhaps,
briefly the defects in the American system of banking prior to that, and then
(Mr, John W. Pole.]
118 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
the object of the system, and its relationship to the inspection system which
he described yesterday.
Mr. W. F. Mactean: May I put that in another way. I was going to ask
practically the same thing. I would like to ask the witness this:—Is the
strength and efficiency of the United States National Banking system bound
up with and dependent on (1) National Currency; (2) National Discounting
for member banks of the Federal Reserve Bank system; (3) Is it also bound up
with the National examination of those banks as carried out by your Depart-
ment, and (4) the relation of the National Gold Reserve to those things.
That is the issue just now, and with your permission, Mr. Shaw, I would
like the witness to answer these questions.
The CuHatrMAN: If it were agreed that Mr. Pole would make a statement
merely and that the members of the Committee would not go into cross-
examination of him on his statement, I would have no objection to it. But
if it was to be a full investigation of the question of the establishment in
Canada of a Central or Federal Reserve, as is suggested in Mr. Shaw’s notice
of motion, which appears on the order paper, I would have to delay that until
I have given my ruling in respect to the notice of motion.
Mr. W. F. Mactean: When do you expect to deliver your ruling?
The CuHairmMan: I do not want to take up too much time to-day, but
I am ready to give my ruling at any time.
Discussion followed.
The CHAIRMAN: In my opinion questions in respect of the effect of such
a bank as regards the safety of depositors would be relevant, but questions which
are outside of that would be irrelevant. That is my impression now. We will
hear Mr. Pole.
Witness: I think, gentlemen, if you will pardon me I shall read a little
excerpt here from the annual report of the Comptroller of the Currency with
reference to a Federal Reserve System, as to whether or not the Federal Reserve
System is necessary:
“The necessity for a Federal Reserve System: It seems hardly
necessary in view of the record of the existing organization, to enter into
any extended arguments, when it would, perhaps, be well to state some
of the basic considerations on account of which it was given its present
form. The principle of a central bank has been a controversial one for
over a century. In deference to the widespread and thoroughly American
distrust of the centralization involved in a single Government bank,
twelve banks were established in different sections of the country in
order to secure the closest possible contact with the local member banks,
and a thorough understanding and adaptability to community conditions.
Through the operations of the twelve individual units a proper sympathy
with and understanding of local conditions and needs is secured, while
at the same time through the Federal Reserve Board a liaison between the
districts and the detachment necessary for a proper compromise between
local interests and national policy is secured. Through the Federal
Reserve System the transfer of funds from points of surplus to points of
deficit is accomplished with the primary purpose of promoting the best
interests of the whole country and not with a view to enabling individuals
or sections to reap a financial advantage at the expense of others. If
it were assumed that the instrumentality for the transfer of funds could
be provided by a private reserve system such as a branch banking institu-
tion, it could hardly be fairly contended that the controlling influence
would be other than profit.
{Mr. John W. Pole.]
_ i as
BANKING AND COMMERCE 119
APPENDIX No. 14
Necessarily, in adjustments of this kind the interests of a branch
bank or individuals must be private property and not public welfare.”
Mr. Mactan: That is a good doctrine.
The Witness: I will read further:
“The whole Federal Reserve System bears a very striking analogy
to the general principles which underlie the American Government, being
founded upon a system of cheques and balances calculated to preserve
local independence under centralized and co-ordinating control. It would
be so distinctly a step backwards and so manifestly a dangerous pro-
ceeding to destroy the regulated co-operation of banking facilities that it
seems entirely unnecessary to discuss further the necessity for some sort
of a reserve system, and the issue is, should it be done by Governmental
co-operation or private centralization?”
I should like to read also with regard to a matter I brought out yesterday
as to the simultaneous examination of branch banks, as it had an aspect on the
question:
“As a practical consideration, aside from the broader aspects of the
case, it must be constantly borne in mind that the Federal Reserve System
can only be successfully maintained if the administrative authorities
have an adequate knowledge of the conditions of the member banks. This
necessitates examination, which, in the case of the National Banks is pro-
vided by the Comptroller of the Currency, and these National Banks can-
not engage in banking beyond the limits of the city in which the institu-
tion is located. In the examination of State Banks the Federal Reserve
System is compelled to rely on its own examiners and such incidental
and voluntary assistance as it can secure from the various state officials.”
“The examination of an institution with branches and subsidiaries is
a very difficult one. The inter-departmental relationships vastly com-
plicate it. It is more difficult to examine ten institutions of a given size
which are associated in a branch banking system than it would be to
examine ten independent institutions, as all of the transactions between
the different branches have to be investigated and eliminations and adjust-
ments made to produce a composite picture and prevent the improper
manipulation or shifting of assets. This cannot be done satisfactorily
without a simultaneous examination of the parent bank and all the
branches. Bank examination involves very much more than a mere scrutiny
of figures. Questions of moral character, of local reputation, of valua-
tion of securities, of conformity to laws and rulings—these and many
other elements enter into a proper examination. In the case of the
examination of a large bank, with seventy-five to one hundred branches,
it would be impossible to mobilize a force of examiners of the ability to
make an intelligent analysis of the situation in each individual community,
even if it is to be assumed that the character of the banker is not a factor
in the condition of the institution.”
The National Bank System has been in force since 1865 and the Federal
Reserve Act was passed in 1913. The powers of the body are:
“st. To adopt and use a corporate seal.
2nd. To have succession for a period of twenty years from its
organization unless it is sooner dissolved by an act of Congress, or unless
its franchise becomes forfeited by some violation of law.
8rd. To make contracts.
(Mr. John W. Pole.]
120
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
4th. To sue and be sued, complain and defend, in any court of law
or equity.
5th. To appoint by its Board of Directors such officers and em-
ployees as are not otherwise provided for in this Act, to define their
duties, require bonds of them and fix the penalty thereof, and to dismiss
at pleasure such officers or employees. :
6th. To describe by its Board of Directors, by-laws not incon-
sistent with law, regulating the manner in which its general business
may be conducted, and the privileges granted to it by law may be
exercised and enjoyed.
7th. To exercise by its Board of Directors or duly authorized officers
or agents all powers specifically granted by the provisions of this
Act, and such incidental powers as shall be necessary to carry on the
business of banking within the limitations prescribed by this Act.
8th. Upon deposit with the Treasurer of the United States of any
bonds of the United States in the manner provided by existing law
relating to National Banks, to receive from the Comptroller of the
Currency circulating notes in blank, registered and countersigned as
provided by law, equal in amount to the par value of the bonds so
deposited, such notes to be issued under the same conditions and
provisions of law as relate to the issue of circulating notes of National
Banks secured by bonds of the United States bearing the circulating
privilege, except that the issue of such notes shall not be limited to the
capital stock of such Federal Reserve Bank. But no Federal Reserve
Bank shall transact any business except such as is incidental and neces-
sarily preliminary to this organization until it has been authorized by
the Comptroller of the Currency to commence business under the pro-
visions of this Act.
Every Federal Reserve Bank shall be conducted under the super-
vision and control of the Board of Directors.
The Board of Directors shall perform the duties usually appertaining
to the office of directors of banking associations and all such duties as
are prescribed by law.
Said Board shall administer the affairs of said bank fairly and
impartially and without discrimination in favour of or against any
member bank or banks and shall, subject to the provisions of law and
the orders of the Federal Reserve Board, extend to each member bank
such discounts, advancements and accommodations as may be safely and
reasonably made with due regard for the claims and demands of other
member banks.”
The Board of Directors consists of nine members, classes A, B, and C.;
Class A members are chosen by the representatives of the stock-holding banks;
Class B consisting of three members, are men who shall be actively engaged
in commerce or agriculture or some industrial pursuit in the district in which
the bank is located; Class C directors are three members who are designated
by the Federal Reserve Board.
By Mr. Ladner:
Q. They are all appointed by the President?—A. The Class A directors
are elected by the stock-holding banks—that is, three directors; the next three
are elected from those who are engaged in commercial or industrial pursuits;
and the Class C directors are designated by the Board.
(Mr. John W. Pole.]
a
BANKING AND COMMERCE 121
APPENDIX No. 1
By the Chairman:
Q. Class B directors are elected, but by whom?—A. By the shareholders,
but they shall not be bankers.
By Mr. Good:
Q. Mr. Pole, are you speaking now of the directors of the regional banks?
—A. Yes, of which there are twelve.
Mr. Lapner: Speaking of the Federal Reserve Bank.
By Mr. Shaw:
Q. The Federal Reserve Board is appointed by the President?—A. The
members of the Federal Reserve Board are appointed by the President, but I
am speaking now of the twelve Federal Reserve Banks.
By Mr. Hughes:
Q. Class A and Class B are both appointed by the share-holding banks?
—A. Yes.
Mr. Goop: Might I make the suggestion that before Mr. Pole ceases to
deal with the relationship between the Federal Reserve System as it has worked
out in the United States, and the safety of depositors? I think that is one
thing we are particularly interested in, an entirely relevant thing. I think
Mr. Shaw mentioned something as to the condition in the United States
prior to the adopted system, as to the defects which existed then, and the way
in which the system met these defects in regard to the safe-guarding of
depositors.
The CHARMAN: But the Committee must bear in mind that the system
which existed then in the United States was quite different; it was a system of
individual banks.
The Wirness: Before the Federal Reserve Act was passed, the system of
reserves was entirely different from what it is under the present law. Formerly
a bank had to carry its reserve in central reserve cities, and it meant, in fact,
there was a pyramiding of reserves, resulting, in the final analysis, that all
reserves were carried in New York, Chicago, and St. Louis, these being the
three central reserve cities. After the establishment of the Federal Reserve
System, the membr banks, or the National Banks—
By Mr. Shaw:
Q. May I interject a question? Will you explain the weakness of the con-
centration of the reserve in those centres, and how it affected depositors?—A.
The centralized reserve was regarded as working quite well in normal times,
but in tight times, where there was no means of obtaining money except through
its correspondent banks, where these reserves were deposited, the probability
is that those localities themselves were in such shape that they could not
advance any money to their correspondents over the country, and that, of
course, added to the stringency; while the Federal Reserve Bank is divided
up into twelve units and those twelve units are geographically arranged so that
the country is well covered and the reserve of each distinct bank—of each
member of the Federal Reserve System—is kept in the Federal Reserve Bank
of its particular district. Now the particular advantage of the Federal
Reserve System is the re-discounting privilege which it offers to its members,
and that, to my mind, is an extremely important thing. The National Bank
notes are comparatively unimportant as compared with the re-discounting
[Mr. John W. Pole.J
122 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
privilege, as upon the endorsation of any of its member banks, any Federal
Reserve Bank may discount notes, drafts and bills of exchange arising out of
actual commercial transactions; that is, notes, drafts, and bills of exchange
drawn for agricultural industrial, or commercial purposes, and the profits of
which have been used or are to be used for such purpose, the Federal Reserve
Bank having the right to define or determine the character of the paper.
Mr. Lapner: Mr. Chairman, on this question of re-discounting: I wonder
if Mr. Pole would explain the difference of the systems of Great Britain and
the United States. I understand the one in the United States tends to inflation.
and in Great Britain there is a penalty which deters the borrowers.
Mr. McMaster: I think it would be better to let Mr. Pole complete his
bird’s-eye view.
The CuatrMan: I would suggest Mr. Pole go on with his statement.
The Witness: The class of paper which is eligible for re-discounting,
then, is agricultural or industrial paper of a current character; that is, as
nearly as possible, of a self-liquidating character, and maturities are for ninety
days in the case of commercial paper, and nine months in the case of agri-
cultural and live stock paper, and I see it corresponds very much to a class
of paper which may be discounted under this Act of your own, which is
entitled “The Finance Act.” Of course, the advantages are very obvious, as
in times of depression with declining deposits, the bank can bring its eligible
paper to the Federal Reserve Bank and get that paper put into loanable funds
again, and it might be said that it has a tendency toward inflation, but that
is pretty much regulated, because the Federal Reserve Banks, as a general
thing, adopt what they call a “basic line,” and that basic line is determined
by the amount of loanable funds divided up proportionately in ratio to the
capital and surplus, for instance, as a guide to the bank, even with the authority
to make a sliding interest rate so that after a bank has got beyond its basic
line, the rate of interest perhaps will rise from 54 per cent to 6 per cent, and
beyond another point, from 6 per cent to 64 per cent, and beyond still another
point, 64 to 7 per cent, etc. That was in vogue during 1920, but there has
been no occasion since that time to carry out that idea.
Mr. Chairman, it would be a good guide to me if any of the members
who desire would ask questions on any point of the Federal Reserve Banking
System. I think then I would come more nearly giving them what they want.
The CuarrMan: Before the members of the Committee are allowed to
put questions, I would be obliged to give my ruling, which after all, may clear
the atmosphere to this extent, that after that, the Committee may cross-
examine the witnesses on points of their statements which may be of interest
to them. I thought under the agreement which has been accepted by all the
members that we would leave the decision in abeyance until to-morrow.
_ Mr. Lapner: Cannot the Chairman give his ruling now, because these
things are all fresh in our minds, and this is the time to ask questions.
The CHAIRMAN: The ruling is in respect to a motion by Mr. Shaw which
appears under a notice of motion on the Order Paper.
ted 1. The Order of Reference from the House to this Committee reads as
ollows:
_“The Select Standing Committee on Banking and Commerce should
be instructed to consider the provisions of the Bank Act with a view to
recommending such amendments to the Act as will better protect the
interests of depositors generally and will prevent similar occurrences in
the future.”
[Mr. John W. Pole.]
BANKING AND COMMERCE 123
APPENDIX No. 1
2. Mr. Shaw moves the following:
“That this Committee is of the opinion that the purpose, organization
and operation of some type of properly administered Central or Reserve
Bank falls within the scope of the Reference, and that the sub-committee
be hereby instructed to suggest to this Committee the names of com-
petent witnesses to give evidence on this subject.”
3. The creation of a Central or Reserve Bank, however would be a radical
departure from our present system of banking.
4. Did the House intend to empower this Committee to recommend amend-
ments which would fundamentally change the Act?
5. The Act is revised every ten years, and it would be detrimental to the
stability of our financial institutions if a thorough revision were to take place
every year.
6. The Order of Reference limits us to recommending such amendments as
would better protect the interests of the depositors.
7. The purpose of the Central or Reserve Bank is not directly better to
protect the depositors, but to afford greater rediscounting facilities.
&. The difficulties which confront the depositors of the Home Bank appear
to be due, not to the lack of discounting facilities, but on the contrary, to the
great facility with which the Bank made advances on doubtful or valueless
securities.
9. A Central or Reserve Bank could not have rediscounted these doubtful
securities, and therefore would not have offered a greater elasticity, and the
depositors would have received no additional security for their deposits.
10. It has not been established to the satisfaction of the Chair that the
organization and operation of some type of Central Bank would better protect
the interests of depositors generally, and would prevent similar occurrences in
the future.
11. The matter of the establishment of a Central or Reserve Bank was fully
investigated last year, and a considerable time was spent in collecting valuable
information which has been printed and which is now available to Honorable
Members.
12. It is possible that any change in the Bank Act more or less remotely
affects the interests of the depositors.
13. But should we not endeavour to suggest amendments most likely to
receive the approval of Parliament, and primarily some method which would
have a more certain, direct and decisive effect to increase the safety of the
depositors.
14. In my opinion, such were the instructions of the House.
15. To do otherwise would turn this limited Reference into an unlimited
one, involving possibly the revision of the whole Act.
16. In my humble judgment, I am obliged so to decide, and therefore to
find that the subject-matter covered by Mr. Shaw’s motion, namely the pur-
pose, organization and operation of a Central or Reserve Bank, does not fall
within the scope of the Order of Reference.
Mr. Lapner: Mr. Chairman, I would move that this decision of the Chair
be referred to the House for fuller authority to consider the question of a Central
or Federal Reserve Bank. The Chairman, I think, is in error in his findings
that last year the matter was fully considered, or that we are prevented from
considering it this year. At the close of the sittings of the Committee last year
I specifically offered a resolution regarding this question, because my pro-
i (Mr. John W. Pole.]
1—21
124 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
posal for a National Federal Reserve Bank was up, asking that the Committee
do not make a final decision, and I understand that the Committee reported
last year that this matter was left open because of the limitations in our scope
last year. I think that with witnesses coming from the United States, and the
situation as it is in Canada at the present time, we should not choke off the
question of safety to depositors, but rather give it a full investigation.
(Discussion followed).
Mr. Suaw: Without suggesting any disrespect to your ruling, Mr. Chair-
man, bwt simply for the purpose of getting the matter before the Committee,
I would move an appeal from the ruling of the Chairman on this matter.
The CuHarrMan: Mr. Shaw moves that the ruling of the Chair be not sus-
tained.
Motion declared lost on division; 12 yeas; 14 nays.
On motion of Mr. Spencer, division recorded.
Mr. Lapner: I move that the decision of the Chairman on this question of
taking evidence in connection with a Federal Reserve Bank system be referred
to the House, with the request that the Committee be empowered to consider
such a question.
Mr. Suaw: That the scope of the Reference be widened.
Mr. Lapner: Yes, that the scope be widened.
The CuarrMan: If Mr. Ladner will put his motion in writing, it will remain
as a notice of motion for to-morrow.
Mr. Goop: When may this matter be brought up in the House?
The Cuatrman: After our next sitting, or we can immediately take a vote
with the unanimous consent of the Committee.
Mr. Suaw: I would suggest that with the unanimous consent of the
Committee we take the feeling of the Committee now as to whether the House
should be asked to enlarge the scope of its work so as to include this matter,
and so it can be brought up this afternoon.
The CuatrMan: If it is the unanimous opinion of the Committee, we will
take a vote now, but unless it is with the unanimous consent of the Committee
we will have to abide by the ruling.
Mr. McMaster: I would suggest that Mr. Ladner amend his motion to
read that the Chairman be instructed to ask from the House such an enlarge-
ment of our Reference as will permit us to hear evidence upon the question of
the establishment of a Federal Reserve Bank.
Mr. Lapner: The motion should be that the minutes of this meeting be
reported to the House, and I will make a motion in that form.
Discussion followed. :
The CuHamMAN: The motion should be that a report of this Committee
be presented to the House with the view of obtaining an enlargement of the
order-of-Reference so as to embrace the purpose, organization and operation
of some type of properly administered Central or Reserve Bank.
Mr. Lapner: I will move that, seconded by Mr. Good.
Discussion followed.
The CHatrman: Mr. Ladner moves, seconded by Mr. Good, that the
report of this Committee be presented to the House with the view of obtaining
an enlargement of the reference so as to embrace the purpose, organization and
operation of some type of properly administered Central or Reserve Bank.
Does the Committee wish to have the vote recorded?
Mr. John W. Pole.]
BANKING AND COMMERCE 125
APPENDIX No. 1
Several Mempers: Yes.
Mr. Goop: Before you put the question, Mr. Chairman; there seems to be
a little misunderstanding with regard to the motion. Mr. Hughes wants the
word “study ” put in there.
Mr. Hucues: Or “ consideration.”
The CHairMAN: So that it will read: ‘ The report of this Committee be
presented to the House with the view of obtaining an enlargement of the
reference so as to embrace the study—or consideration—
Mr. McMaster: Both “study” and “consideration’”—
Mr. Lapner: Why not both “consideration” and “study”?
Mr. Warp: Why not both of them?
The CuHatrMaANn: Therefore, the motion will read as follows: “so as to
embrace the study and consideration of the purpose, organization and operation
of some type of properly administered Central or Reserve Bank.”
(The Committee divided on the motion (Mr. Ladner) which was affirmed,
on division, 22 for and 7 against.)
By Mr. Shaw:
Q. In connection with the Federal Reserve System, Mr. Pole, I want to bring
out very shortly one point which occurred to me from my study of the American
system in force prior to that time. Was it not a fact that the American
system prior to the inauguration of the Federal Reserve Act suffered from
what I will call “ decentralized reserves’?—A. That, together with the inelas-
ticity of the currency.
Q. Now, the object of the Federal Reserve System is to mobilize those
reserves in twelve regions, each presided over by a Federal Reserve Bank?—
A. That is correct.
Q. And, of course, this system means that in the event. that any portion
of the country is suffering by reason of lack of reserves at any particular
moment, all the reserves can be readily mobilized, or a necessary portion of
them, in that direction?—A. That is correct. In that manner a Federal
Reserve Bank is required to re-discount for another.
Q. You remember, of course, very well the panic of 1907?—A. Yes.
Q. And the Federal Reserve Act was not then in force?—A. No.
Q. They had at that time the system of Central Reserves, about which
you have spoken?—A. Yes.
Q. Is it not a fact that the reserves of the United States were centred
largely in those three Central Reserve cities, Chicago, New York and St. Louis,
and were not readily available to outside centres? That is a fact?—A. That
is correct.
Q. And as a result of the stringency, there were failures of many banks in
all parts of the United States?—A. The reserves in 1907 were carried by the
country banks in reserve cities, and the reserves of the reserve cities were
carried in the Central Reserve cities and the result was that the country banks:
would carry their reserves with the reserve cities in the shape of uncollected
items very frequently, and the same would be true in the case of the Reserve
Banks with the Central Reserve Banks, so, as a matter of fact, the reserve
of the country banks was not a reserve at all; it was fictitious, and to a large
extent that was true in all the large cities—
Q. Yes, but is it not true, Mr. Pole, that even at that time the reserves in
the reserve cities were not available and they had to issue clearing house
[Mr. John W. Pole.]
1—213
126 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
certificates which, of course, were of little value so far as the necessities of
the case demanded?—A. Yes.
Q. And therefore, a great number of banks were forced to close their
doors?—A. Yes.
(. Causing a tremendous loss to depositors at that time?—A. That is
correct.
Q. So, to put it shortly, the Federal Reserve System mobilizes the reserves,
making them available to any section of the country?—A. At any time.
(). In the event of a stringency ?—A. That is true.
Mr. McMaster: What would happen if the stringency occurred all the
way around?
By Mr. Shaw:
Q. Supposing there was a nation-wide stringency, what would be the
fact?—A. Under the Federal Reserve System there could be no such thing as
of money panic, with the present-day re-discounting privileges which are afforded
by the Federal Reserve System, because there is practically no limit to the
extent to which they may issue Federal Reserve notes against commercial
paper or agricultural paper, so that funds for immediate needs are available
through such issuances by anyone of the Federal Reserve Banks.
By Mr. McMaster:
Q. Elasticity ?—A. Elasticity.
By Mr. Shaw:
Q. You spoke about another matter which led me to think, by inference,
that the former system was not elastic enough, and the Federal Reserve System
now furnishes, to a large degree, the necessary elasticity. As I understood you
yesterday, the National Banks were able to secure notes up to the extent of
their capital upon depositing security dollar for dollar?—A. That is true.
Q. But they could not in case of a necessary expansion go beyond that
limit?—-A. No, that was limited to their capital. Of course, beyond that, a
bank could borrow money. There was no particular advantage to a bank in
issuing its circulation.
Q. Will you explain, Mr. Pole, if you please, in what way elasticity in
the note issue has been secured by the Federal Reserve System?—A. In that a
bank may take its eligible paper from its portfolio at any time and make its
offering to the Federal Reserve Bank, and the Federal Reserve Bank in return
will immediately issue its Federal Reserve notes—not bank notes, but Federal
Reserve notes.
Q. And the necessary elasticity is secured in that way?—A. Yes. The
Federal Reserve notes, if a bank wishes to do it, are shipped to it directly from
the Federal Reserve Bank—the actual currency.
Q. These notes are currency?—A. Yes.
By Mr. Hughes:
Q. What is the difference between Federal Reserve notes and Federal Re-
serve bank notes?—A. The difference between Federal Reserve notes and
Federal Reserve bank notes is that in the first instance a Federal Reserve note
is secured by commercial paper which may be acceptable to a Federal Reserve
agent when offered to him by a Federal Reserve bank—the Federal Reserve
agent being the Government’s representative in that bank—and against that
paper the Federal Reserve notes are issued.
Q. Are these circulated from hand to hand?—A. Very readily.
Mr. Macuean: And the credit of the United States is behind all these notes?
[Mr. John W. Pole.]
BANKING AND COMMERCE 127
APPENDIX No. 1
The Wirness: The Federal Reserve Bank note is a note which is issued
against the security of Federal bonds.
By Hon. Mr. Stevens:
Q. Is it a better security than the other?—A. It is just as good; no better.
By Mr. Hughes:
Q. Of equal value in that respect?—-A. Equal value.
By Mr. Shaw:
Q. Now, the effect of these two points which you suggest has been, has it
not, Mr. Pole, to mobilize the commercial reserves of the United States which
prior to the operation of the Federal Reserve Act were immobile?—A. Yes.
Q. Until the time of their maturity ?—A. That is true.
Q. Even with respect to short-term commercial paper?—A. That is per-
fectly true.
Q. Then another point to which I referred, and which I want to ask you
about again. Before the inauguration of this system was there not a lack—per-
haps a complete lack—of the central control authority so far as mobilization of
reserves is concerned?—A. There was a lack of authority in that respect.
Q. Now there is authority which intelligently, presumably at least, guides
this whole banking matter in the United States, is that true?—A. That authority
being the Federal Reserve Board.
Q. Which, as you have already suggested, is appointed by the President?
—A. Yes.
Q. Therefore, these four points, the mobilization of which, you spoke, of
reserves, the mobilization of what would otherwise be immobile commercial
paper, the creation of elasticity in the note issue, and the central contro] authority
which is now in vogue, each and all make, do they not, directly for the safety
of depositors in American banks?—-A. Undoubtedly.
By Mr. Maclean:
Q. Does the difference between the former and present provisions of the
Act in the United States not mean that the credit of the whole United States
comes to the relief of a situation in a way which it did not heretofore?—A. That
is a point well taken; that is correct.
By Hon. Mr. Stevens:
Q. Mr. Shaw has pointed out a thing to which you agreed, that in 1907
there was a great panic, and great suffering—to use Mr. Shaw’s words—and
immense losses occurred. That was prior to the establishment of the Reserve
Bank?—A. Yes.
Q. And the suggestion is made that the establishment of a Federal Reserve
Bank has acted as a remedy, or as a preventative of such large losses as occurred
in that year being repeated?—-A. That is true.
Q. I have here a copy of Dun’s report and I want to base a question upon the
very pertinent figures. In 1907 there were twelve National Bank failures, and
120 State Bank failures, with a loss of $220,000,000 in the latter case, and
$12,000.000 in the former. Now we come to 1914, the first year after the estab-
lishment of the Federal Reserve Bank—
Mr. SuHaw: In connection with those figures, I do not know that 1t would
be fair to take any one year—
Hon. Mr. Stevens: I am taking six years. Take 1914: there were 19
National Bank failures and 193 States Bank failures, with a total loss of approxi-
mately $55,000,000 in 1915 there were 18 National Bank failures and 115 State
[Mr. John W. Pole.)
128 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Bank failures with a total loss of about $37,000,000; then there were a few years
with smaller losses, and we come to 1920, which was a very prosperous year. In
1920 there were 10 National Bank failures and 109 State Bank failures, with an
estimated liability of about $50,000,000. These figures are all in round numbers
as far as dollars are concerned. In 1921 there were 47 National Bank failures and
357 State Bank failures with a loss of approximately $170,000,000; then in 1922
there were 35 National Bank failures, and 242 State Bank failures, with a loss
of about $73,000,000, and in 1923 there were 77 National Bank failures and 501
State Bank failures, with a loss of about $200,000,000. To summarize this, since
1913—that is ten years ago—there have been 222 National Bank failures and
1,664 State Bank failures. I have not had the time to add up the total loss, but
it runs up very high. Now my point is this, Mr. Pole, if you will permit me,
in view of these increasing failures and the losses in the United States during
recent years since the establishment of the Federal Reserve Bank, how can it be
argued that the Federal Reserve Bank has in any very material sense con-
tributed to the prevention of failures; I am not saying it is the cause, but how
does it contribute materially to the prevention of failures?—-A. I do not think
it ean be said that it is a criterion of the merit of a system when you take that
period immediately after the war. Of course, there were tremendous profits built
up in 1920, but since that time the deflation has been so tremendous, and the
times have been so abnormal, that we are almost tempted to ask the question,
“What would have happened if we had not had the Federal Reserve System?” In
addition to this, may I add that your figures state there is a very large propor-
tion of these failures attributable to the State Banks. Of the 20,000 State Banks
only 1,600 are members of the Federal Reserve System.
Q. However, the facts are correct— -—A. I will not dispute the facts.
Q. Really the point I want to make is that there is no system that is in-
fallible and will prevent failures—A. Absolutely none, as far as I know; it
has never been devised.
Q. Let me turn to a comparison of your system and our own. You kindly
referred to the Federal Reserve Act and read, I think, Chapter 13?—A. Yes.
Q. I will not read it again but in that Chapter is designated the character
of the discounts in what is known as the Finance Act, which I think you have
read, and we have the following securities which may be discounted by a Head
Office Bank with the Minister, or, as we might say, the Treasury Department,
Treasury bills, bonds, debentures or stocks of the Dominion of Canada, the
United Kingdom, any province of Canada and of any British possession; public
securities of the Government of the United States, Canadian municipal securi-
ties, promissory notes and bills of exchange secured by documentary title to
wheat, oats, rye, barley, corn, buckwheat, flax or other commodity, and promis-
sory notes and bills of exchange issued or drawn for agricultural, industrial or
commercial purposes and which have been used or are to be used for such pur-
poses. Is that not a wider range of discount, under the Canadian laws, than that
which is adopted and accepted by the Federal Reserve Banking System of the
United States?—A. I think it is no wider. There is nothing in there that would
not be eligible for negotiation—I would not say “re-discounted” because Treasury
bills cannot be re-discounted—but as far as the Treasury bills, bonds, debentures
or stock of the Dominion of Canada are concerned, any bank in the United
States may borrow money on those bills payable from the Federal Reserve Bank
—on such security.
Q. You do not include municipal securities in that?—A. No. I see in your
Act you have included municipal securities.
Q. Do you accept foreign securities? —A. There is an exception in regard to
foreign securities; it is not included; there is not a wide difference.
[Mr. John W. Pole.]
BANKING AND COMMERCE : 129
APPENDIX No. 1
Q. Ours, if anything, is slightly wider?—A. Assuming liberality of con-
struction of clauses D and E.
Q. Yes, this naturally would have to be, under the definition of this Act?
—<A. Yes, I think in that case there is a wide range of bills of exchange and the
commodity paper which may be discounted under the Federal Reserve System
of the United States.
Q. Having in mind our Branch Bank System, and the National Banks
having the privilege of this rediscounting with the Finance Department, can
you see any great advantage in the establishment of a second rediscounting
system in Canada?—A. Of course the point is that not being very familiar with
the details of the system of banking which is in force in Canada, it is a ques-
tion whether my opinion as to what would be adequate would be of any value.
I do not say that this Finance Act certainly would add very greatly to the
present system which is in vogue.
Q. That is, providing facilities for rediscount?—A. Yes.
Q. Comparable, not in magnitude, but in accommodation to the American
Federal Reserve System?—A. Decidedly so.
Q. Let me put my question in a different manner, and perhaps with less
offence. Prior to the inauguration of the Federal Reserve System in the United
States, there did not exist a similar accommodation or facilities for rediscount?
—A. Except emergency measures.
Q. Which, of course, were in this country as well. We had emergency
measures too?—A. Yes.
Q. Then the Federal Reserve System in the United States was to serve
an individual bank system which was in vogue in the United States?—A. That
is correct.
Q. In so far as the branch bank system in the United States is concerned—
I have a few figures here somewhere—they are extending in many States,
particularly, for instance, in the State of California. That is true is it not?
—A. Yes.
Q. Does the extension of the branch system lend itself in those States to
a wider facility in those banking houses to serve the public?—A. I do not
think so.
Q. Would it, under the Federal Reserve System?—A. The Federal Reserve
System prohibits the affiliation with it of banks which have a large number of
branches.
Q. A moment ago, you referred to the small number of State banks. Is it,
or is it not true that a number of National Banks have reverted, or limited
their operations to State Banks?—A. That is true.
Q. Is it not also true that any State Bank may, if it wishes, by receiving
endorsation from a Federeal Reserve member bank take advantage of the
Federal Reserve system?—A. It does do so.
Q. With eligible paper, of course. Is it not true that any of the 22,000
State Banks can have the facility of rediscounting offered by the Federal
Reserve System, providing they have the endorsement of a member bank?—A.
Indirectly, from its correspondent bank.
Q. So that while the record shows 1,600 State Banks as members, it is
quite possible that a large proportion of the balance use the system of re-
discounting through member banks?—A. No doubt, a certain proportion of them
would, to the extent to which the correspondent bank would be willing to
accommodate them, only.
By Mr. Hughes:
Q. The correspondent bank would be a Reserve Bank?—A. The correspon-
dent bank would be its correspondent bank in a larger city.
(Mr. John W: Pole.] '
130: SELECT STANDING COMMITTEE
14-15 GEORGE’V, A. 1924
By Hon. Mr. Stevens:
Q. Regarding the examination made, you made the statement yesterday,
which I think was very pertinent, and I think you repeated it this morning to
the effect that it is very difficult to examine a bank with a number of branches,
very much more difficult; and if there was a general branch bank system, I think
the report of the Comptroller of Currency indicated that it would be impossible
to keep an army of officers large enough to accomplish the work?—A. There is
no doubt about that.
Q. Therefore, an examination system in Canada, with its branch bank
systems and head office system of a type of character similar to the bank ex-
amination in the United States, would not be applicable, or would not be
feasible?—A. I think not.
Q. In your estimation, would it be so cumbersome as to be unworkable?—A.
I should say so; it would be very expensive and impracticable.
Q. You are aware, I think, Mr. Pole, of the system followed in Canada;
that is, we have an internal audit of the bank; then we have in our banking
system in Canada inspectors, corresponding in power to the bank examiner of
the United States; only he is an employee of the head office of the bank in
Canada. He steps into the branch office, and takes full charge, just as you have
described—takes full charge of that branch, immediately takes possession of the
cash and securities, and checks them in practically the same manner as you
describe the examiner in the United States banks does?——A. Yes.
Q. In your opinion, is not that internal audit, plus the examination by an
inspector, to which I referred, which is irregular in periods; plus the additional
audit provided under our Act last year, a fairly correspondingly safe system
to that which you practice in the United States, having in mind the difference
in these systems of banks.——A. Having in mind the difference of the systems,
and eliminating the thought that a simultaneous examination of the parent bank
and all its branches is regarded as essential to a proper examination of the bank,
I should say that the system as at present in force goes about as far as it
could go.
Q. In Canada?—A. In Canada. I mean to say that it is probably as good
a system as could be devised except that I think, as I stated yesterday, it might
go a little further.
Q. I think we agreed with you in that?—A. Yes.
Q. Having them in mind the Canadian system and the American system,
and from your experience as an examiner, would it be advisable or feasible to
adapt the American bank examination system to the Canadian banking system
without changing the principle of our banking system to correspond with the
principle of the banking system of the United States?—A. It could not be done.
Q. It could not be done without that change?—A. It could not be done.
The Committee adjourned until 11 o’clock, Thursday, May 22nd.
Housr or CoMMoNs,
ComMmMiTTEE Room 429,
TuHurspay, May 22, 1924.
The Select Standing Committee on Banking and Commerce met at 11
o’clock a.m., the Chairman, Mr. Vien, presiding.
The CuatrmMan: It is moved by Mr. Hughes
[Mr. John W. Pole.]
BANKING AND COMMERCE 131
APPENDIX No. 1
» “That the Bank Act be amended by adding thereto as subsection three
of Section 125, the following:—
“(3) Transfers or sale of shares of the bank by directors or other
executive officers of the bank, made within a period of one year priod to
any suspension by the bank of payment of any of its liabilities as they
accrue in specie or Dominion notes, shall be null and void at the option
of the transferee who may elect to return such shares or any of them to
the transferor and be thereupon entitled to recover the amount of the
purchase price thereof, and, in the event of such option being exercised
the transferor shall be and become liable as a shareholder under sub-
section one of this section and the transferee be not liable in any respect
whatsoever as to the said shares under the said subsection one hereof.”
This will remain as a notice of motion for next sitting.
I wish to advise the Committee that I have made enquiries to the number
of copies of the report of the proceedings available. If hon. members will send
to the Clerk their requirements, we shall endeavour to meet them, provided the
requirements are reasonable. I have tried to make arrangements for a list of
addresses to which hon. members would like their copies to be sent every day,
but I find that it is impossible to do that. It would involve either the Clerk
or his assistant addressing 600, 700 or 800 copies every day; but if hon. members
will send in the number they require, these copies will be sent to their office
every day, and it will be an easy matter for hon. members to arrange with their
stenographers to have a list of addresses prepared. That arrangement would
be much more simple than that of having an additional staff in connection with
the Committee to do the work. Requests for copies should be sent to Mr.
Gordon, Room 433, and every morning, the number of copies requested by the
members, to a limited extent, will be sent to their rooms.
Mr. McBrive: I think the number should be limited. It is putting the
House to considerable expense, and I think we should limit the number to that
of Hansard.
Mr. McKay moved, seconded by Mr. McBride that the number of copies
sent to each member be limited to ten, and only upon request.
Motion agreed to.
Mr. Hearty: Does the Chairman know whether the Minister of Finance
will be here.
The CHAIRMAN: He told me he would be.
Mr. Heaty: I see in Hansard that a misunderstanding arose in the House
yesterday when the Chairman reported to the House, on account of the absence
of the Minister. There was no understanding that the proceedings of this
Committee would be limited in the way suggested yesterday, and the House
should have corrected that mistake. If the Minister was not present and there-
fore did not understand what was before the House, I think he should be here
so that there may be no misunderstanding.
Mr. Goop: What is the matter referred to?
Mr. Hearty: We are in the position to-day of not being able to ask wit-
nesses questions about the re-discounting system or things like that, on account
of the ruling given yesterday.
The CuamrMAN: I may advise the hon. member that Mr. Shaw’s motion
came up yesterday and I gave my ruling that it was out of order. The ruling
of the Chair was upheld by the Committee. Then a motion was moved and
{Mr. John W. Pole.]
132 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
carried that the Committee report to the House and endeavour to obtain from
the House an enlargement of the Reference so as to cover the subject matter
of Mr. Shaw’s motion.
Mr. Hearty: That is exactly as I understand it.
The CHatrRMAN: That is what has been done. When I reported to the
House, I had to move concurrence in the report of the Committee, whereupon
the Minister of Finance got up and said that he could not agree to the immed-
iate concurrence, which could be had only with the unanimous consent of the
House. The motion for the concurrence of the House in the report of the
Committee could not carry except by notice of motion.
Mr. Hearty: That is exactly what I refer to.
The CuatrMAN: The Minister of Finance said he had not been able to
take cognizance of the report of the Committee before the opening of the House,
and suggested that the report be left on the table and that the motion stand
until he had time to look into it.
Mr. Hearty: What position does that put us in to-day, when Mr. Williams
comes here?
Mr. W. F. Macitran: He will not be limited.
The CHAIRMAN: You have got to make the best of it, because we have
followed the rules.
Mr. Hmaty: How can we make the best of it when you have ruled against
it?
Mr. Evurr: I think it is possible for the Chairman to use considerable
discretion in regard to questions to be asked.
The CHAIRMAN: Yes. My ruling is to the effect that the subject matter of
Mr. Shaw’s motion is not covered by the Order of Reference to this Committee,
but that any question bearing on the relation of a Central bank to the safety
of depositors would be quite in order. We have now Mr. Pole, who is ready
to continue his evidence.
Mr. J. W. Powe recalled.
Mr. Hucues: When we adjourned yesterday, we were discussing the
Reserve Bank system in the United States, and I would like to ask two or
three questions.
The CHarrMAN: When we adjourned, Mr. Stevens was examining the
witness.
Hon. Mr. Stevens: There were just two more questions that I wanted
to ask.
By Hon. Mr. Stevens:
Q. I had referred Mr. Pole to our Finance Act, and I had read clause 2
indicating the securities which it was possible for the banks of Canada to use
in taking advantage of the Finance Act. I just want to refer for a moment
to clause 3, bringing out another feature of our system, and one which I think
is important. Clause 3 reads “ Such securities (that is, as are set forth in
Clause 2) shall be deposited with the Minister or with the Assistant Receiver
General.” Now, in order to make that clear to you, I must add this, that we
have an Assistant Receiver General in every province in Canada?—A. Yes.
Q. Situated at the commercial centres of the provinces; so that under the
Canadian system, the banks have virtually the privilege of, we will use the term,
rediscount, with the Minister under the Finance Act and at the offices of about
[Mr. John W. Pole.]
BANKING AND COMMERCE 133
APPENDIX No. 1
a dozen assistant receivers general. Now then, the question is simply an addition
to what I asked you yesterday, having all that in mind, in your opinion would
there be any advantage to Canada in the establishment or superimposing upon
this system a Federal Reserve bank, or similar institution?—A. The system in
vogue would seem to be entirely adequate inasmuch as the Finance Act offers
every facility, practically, that the Federal Reserve Bank offers at a much
less expense of operation.
Q. Now, one other question, which is not on that immediate subject, but
which I think is important. Having in mind the application of the Federal
Reserve system as supplementary to the security of the public and to the
general banking system of the United States, there was a law passed this year
in the United States—I do not know what they call it—I think it was suggested
by the President, Mr. Coolidge, allocating $10,000,000 for the purpose of assisting
banks in the middle-Western agricultural area, which, on the report of the ex-
aminers, State and National, I presume, indicated a tendency towards insolvency.
because of the shrinkage in securities, numbering about 170, I understand?—A.
Numbering about 170 banks?
Q. Yes, that may be approximately. Now, the question I want to base on
that is, does not this indicate that no matter how perfect one may suppose the
system to be—and at the same time granting that the Federal Reserve system of
the United States has been a wonderful boom to the banking system generally,
does it not indicate that conditions do arise and will arise in the future, that
no system will adequately meet, and that just such emergency legislation as this
will be necessary?—A. That is undoubtedly true. This, however, was not
legislation; this corporation, which you speak of was a privately formed cor-
poration.
Q. At the instance of the President?—A. At the suggestion of the Presi-
dent.
Q. Would you mind elaborating just a little on that?—A. I shall be glad
to do so. It was a private corporation formed in Minneapolis, and the capital
is voluntarily subscribed by banks in Chicago, New York and elsewhere, and is
a corporation organized for the purpose of rediscounting and dealing in stocks
and securities. But it is not intended that the corporation should make any
voluntary contribution to the banks which are in difficulties. I may say that the
National Bank examiners’ reports are accepted by this corporation as a basis
for their transactions, and if it is found that a bank in that unfortunate district
is in such circumstances that it may be solvent, but that it has very seriously
impaired capital, the corporation, after analysing the assets and the liabilities
of the bank very carefully will determine that it is necessary, for instance, to
make a 75 per cent assessment on the stock. But if it is found that the share-
holders of the institution are unable to meet any 75 per cent assessment—the
probability is, that like a great many banks in that part of the country, the
shareholders have already contributed large amounts of money to keep the
bank going, and a further burden is possibly not to be thought of; so that the
corporation which is known as the Agricultural Credit Corporation comes to the
relief of the shareholders for the purpose of re-establishing the capital of that
bank, thereby enabling it to carry on with a fully re-established capital.
Q. In connection with the condition of those banks, would I be correct in
assuming that much of the paper that the banks had in their possession, probably
some that had been rediscounted and not met at maturity, had been classified by
the examiner of the State or National Banks, as the case may be—that it had
been classified under the examiners’ investigation as “bad” or “slow”, and so
forth; would that be a contributing cause to their tendency towards insolvency
or the impairment of their capital?—A. The paper in those districts might fairly
(Mr. John W. Pole.]
134 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
be classified as pretty nearly all “slow” at least; quite a portion of it is doubtful,
but in the summing up of the situation, while cognizance is taken of the doubtful
paper, that paper which is estimated as a loss is that which is taken into consider-
ation in cases of impairment of capital.
Q. For instance, under your Federal Reserve System, you limit the payment
of agricultural paper to 9 months, if I recall?—A. That is for rediscount
purposes.
Q. A great deal of the agricultural paper of that district being ‘‘slow” would
not be of use to any bank for rediscount purposes if not met at the end of the
maturity period, say it is 9 months?—A. It is in the discretion of the Federal
Reserve Bank in that district. It may accept “slow” paper if it feels disposed
to do so. The fact that a piece of paper has been renewed does not make it
necessarily ineligible for rediscount.
Q. Then at the end of 9 months that paper will be renewed in full, and will
be accepted?—A. That is within the determination of the Federal Reserve Bank.
Q. But this $10,000,000 corporation is really implementing the functions
performed by the Federal Reserve Bank and the rediscount system connected
with the Federal Reserve Bank System?—A. It is performing a function which
is entirely different from that of the Federal Reserve Banks. It is lending money -
to individuals to meet their assessments in cases where it is necessary to enable
the bank to remain open.
By Mr. Maclean:
Q. Is it not the case that President Wilson, when he was in office prac-
tically devised this Federal Reserve Bank System and expanded it?—A. Quite
a number of men claim the authorship of the Federal Reserve System.
Q. Since I have seen the statement that there is a great difference in the
provision of the Federal Reserve Banking System—a great difference between
the apportionment of money to agricultural businesses, and to general com-
merce, and that it is not quite so, as Mr. Stevens tried to make out, that there
is ample money in the States for the relief of agricultural needs, and that the
Federal Reserve banking law has been expanded so as to apply to the agricul-
tural interests—is that so?—A. I think that is not correct, Mr. Maclean.
Q. Well then, do you think there is the same opportunity for agricultural
credit—through the Federal Reserve as there is for general business?—A. I
should say there is equal opportunity.
Q. Well, why has the measure recently come up?—-A. The recent measure
came into effect because the Federal Reserve Banks are limited under the law to
rediscounting certain classes of paper. Now, investments in stock for instance,
would not be regarded as obligations which would be eligible for rediscounting,
but the corporation which you refer, has been organized, among other purposes,
for that of investing in the stock of National or State banks, and while the
Federal Reserve Bank might have ample funds to meet such an emergency,
the class of obligations would be ineligible. There are, however, for agricul-
tural purposes a number of agencies in addition to the Federal Bank, which
are governmental agencies, such as “ Federal Farm Loan Board,” “The War
Finance Corporation,” and the “ Intermediate Credit Bank.” Those are three
important ones.
Q. And yet the agricultural depression, in spite of that assistance, is
discouraging?—-A. There has been no lack of credit facilities for the agricul-
turist, Mr. Maclean. There may have been a too liberal extension to the
farmers.
{Mr. John W. Pole.J
BANKING AND COMMERCE 135
APPENDIX No. 1
By Hon. Mr. Stevens:
Q. There is one question I asked you yesterday, and we adjourned just
at the moment, and you made no comment on it other than a direct answer to
my question. I will read it and ask you if you will be good enough to enlarge
a little on your answer. I will read the question I asked yesterday, because it
is the one in my mind:
“Q. Having then in mind the Canadian system and the American
system, and from your experience as an examiner, would it be advisable
or feasible to adapt the American bank examination system to the
Canadian banking system without changing the principle of our banking
system to correspond with the principle of the banking system of the
United States?”
and your answer was, “It could not be done,’ and then we adjourned. It
probably would be a little unfair to place you in the position of allowing that
answer to stand without comment, and it did not quite complete what I would
like to have as your opinion on the subject—A. I have prepared a little
memorandum touching on that subject, if I may read it to the Committee,
and you will pardon me if it appears that I am a little presumptuous in express-
ing an opinion, although you have asked me for an opinion.
After giving thought to the banking systems which are in vogue
in the United States and Canada, it becomes very obvious that the
methods of supervision must differ although perhaps not in their essential
elements.
The examinations of the Unit Banks in the United States may be
so arranged that a large force of examiners and assistants can be kept
constantly employed, and the banks having branches being compara-
tively speaking few it is entirely possible to make simultaneous exam-
ination of the parent bank together with the branches.
In Canada, to make simultaneous examination of the parent banks
and their branches would require an unwieldy force and involve an
expense which would seem to make it prohibitive. The system in
vogue has every appearance of most nearly meeting the requirements
of the situation.
The employment of selected firms of chartered accountants to
inquire into the affairs of the banks, while perhaps not quite as satis-
factory as though they were examined by men employed directly by
the Government whose sole duties were to keep in close touch with the
banks under their immediate jurisdiction and which would be impracti-
cable under the existing circumstances; it is unquestionably sufficient
to meet all the requirements, except that, as far as it has come under
my observation, there seems to be the necessity for extending the scope
of the audits as now made to embrace an exhaustive analysis of the
bank’s assets including added schedules such as “large extensions of
credit to individuals, firms and corporations together with their affilia-
tions, unwarranted investments in any particular class of securities ”
as well as information in connection with the management.
It suggests itself to me there should be a co-ordinating officer of
wide experience in banking affairs with a sufficient force of assistants,
whose activities should consist entirely in compiling statistics and inter-
preting the information gathered; that he should have full powers to
treat with Boards of Directors for the purpose of making adjustments
and correcting criticisms which an analysis of the report of examination
(Mr. John W. Pole.]
136 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
might disclose. With such an executive in charge of the examinations
so conducted, there would without doubt develop opportunities in
numerous ways whereby his services would be of inestimable value to
the banks themselves in adjusting differences and co-ordinating the
banking business of Canada in addition to fully protecting the public
interest. j
The Federal Reserve System has been of inestimable value to the
banks of the United States in ways too numerous to mention. Prim-
arily, with the discounting privileges which it offers to its members,
it has enabled a large number of banks to carry on through periods of
depression when it would have been impossible to obtain funds else-
where, and which must have closed their doors with reluctant heavy
loss to depositors; and while some members of the system have fallen by
the wayside in spite of the facilities which the F.R. banks offered, the
question naturally arises as to how calamitous might have been the
situation had there been no such agency in existence—and to the world
this will never be known, but to those who have been in close touch
with conditions since its establishment, the facts are undisputed.
The Federal Reserve system is admirably adapted to the Unit
system of banking, but for a very small number of banks with a large
number of branches to attempt to adjust themselves so as to fit into
such a scheme would appear to be highly impracticable.
Under the provisions of the Finance Act it seems to be quite
possible for any bank in Canada whose assets would be of such liquid
character as to enable it to take advantage of any facilities offered by
the Reserve system, to avail itself of equal opportunity offered by the
Finance Act, the operation of which is easy and inexpensive, and,
judging from the manner in which it has been functioning, quite
effective.
The choice in Canada then would almost appear to be between a
Federal Reserve System coupled with a Unit system of banks which
change would involve untold difficulties, and a combination of the
Branch Banking System coupled with the Finance Act, which seemingly
is meeting every banking requirement.
By Mr. Maclean:
Q. Would you change the American system for our system, if you had an
opportunity?
By Mr. Hughes:
Q. Some of the questions I intended asking were covered by questions
asked by the other members. However, there are one or two I am going to
ask. Was the inelasticity of the American currency one of the disadvantages
cured by the establishment of the Reserve System?—A. That was one of the
very greatest.
Q. Was it the greatest?—A. I should say that it was.
Q. Then, I think further, that the National Banks have the privilege or
the right to lend on real estate up to 50 per cent of their capital?—A. And
surplus, or one-third of their time deposits. Up to 50 per cent did you say?
Q. Up to 50 per cent of their capital and surplus—aA. 25 per cent of their
capital and surplus, or one-third of their time deposits.
By Mr. McMaster:
Q. Whichever is the larger?—A. Whichever is the larger.
{[Mr. John W. Pole.]
BANKING AND COMMERCE 137
APPENDIX No. 1
By Mr. Hughes:
Q. Or one-third of their time deposits?—A. Yes.
Q. Then, would you call loans of tht nature non-liquid, or frozen—perhaps
non-liquid would be better, or non-active?—A. There is in the country a well-
established market for high-class real estate loans.
By Mr. McKay:
Q. There is a limit of time to five years, is there not?—A. There is a limit
on improved farm property of five years.
Q. And on town property to one year?—A. Yes, on town property to one
year.
By Mr. Hughes:
Q. The Federal Reserve Banks issue their own notes—re-discount the paper
brought to them by member banks? These notes, in the main, I suppose, repre-
sent loans made against liquid or quick assets?—-A. That is a requirement.
Q. If they should re-discount loans that have a long period of time to run
that will represent assets that will not pay for themselves, would there be danger
of an inflation of currency under such a system?—A. There would not be, for the
reason that such paper as you speak of is not eligible for re-discount.
Q. But I thought loans on agricultural paper— —A. A National Bank may
make such loans, but a Federal Reserve Bank may not discount such loans.
Q. They may?—A. They may not.
Q. But they also may?—A. They also may not.
By Mr. McMaster:
Q. They must not?—A. Yes, they must not.
By Mr. Hughes:
Q. Therefore, in your opinion, there is no danger of an inflation of the
currency under the Federal Reserve System?—A. Under the discreet manage-
ment in which the Federal Reserve Banks are operated, I should say that phase
would be fully protected.
By Mr. McMaster:
Q. Coupled with an adequate examination of banks?—A. The examination
of the Federal Reserve Banks as made by the Federal Reserve Board, or by the
Comptroller of the Currency, so I cannot brag of the examination.
By Mr. Hughes:
Q. Under the Federal Reserve System of the United States, and under the
system which we have in Canada under the Finance Act, do you see any
essential difference between the two systems?—A. There is a great similarity.
. Mr. Stevens in one of his questions to-day asked you whether you con-
sidered it advisable or necessary to superimpose a system similar to the Federal
Reserve System in the United States upon the system which we have here now,
and I think your answer was that you did not see any necessity for that, or did
not think it advisable, or something of that kind; but, inasmuch as the two
systems are largely identical, would you see any objection to substituting the
one for the other?—A. I hardly think that the Federal Reserve System could
be substituted for the Finance Act.
Q. Why?—A. For the reason outlined in my remark that it is entirely
adequate for a unit system of banking, but it is not adapted to the—
Q. Branch system?—A. Branch system.
Q. Why?—A. Because it would be too expensive and too cumbersome for
the number of units which it would have to take care of. There being only
(Mr. John W. Pole.]
138 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
fourteen banks, if the fourteen banks should undertake to support the Federal
Reserve System it would be rather an expensive operation.
Q. Because of the expense? That would be largely your objection?—A.
That would be one of the objections, when perhaps the same purpose could be
achieved under the provisions of the Finance Act.
By Mr. Maclean:
Q. You say the two systems are very much alike. Is there not a great
difference in the fact that in the banking system of the United States they use
National notes instead of bank notes, and bank notes have been the great trouble
in this country?
By Mr. Hughes:
Q. Just one question to complete this. The Federal Reserve Banks issue
notes of all denominations, I presume, for circulation in the country?—A. They
do.
Q. For the National currency of the country?—-A. Yes.
By Mr. Shaw:
Q. Now, Mr. Pole, you have had some opportunity to study the Canadian
Banking System, at least during your visit here?7—A. A very good opportunity.
Q. And I suppose you have studied not only the Finance Act, but the
provisions of the War Finance Act, and you know that as a matter of practice
the interest rate is, in practice, a fixed rate—5 per cent? You are aware of
that?—A. I am aware of that.
Mr. McMaster: In connection with what?
Mr. Suaw: The discounting of securities.
The Witness: The borrowing of money.
By Mr. Shaw:
Q. You know, of course, that is under the charge of what is known as the
Treasury Board, composed of the Minister of Finance and, I think, two other
Ministers of the Crown—you are aware of that?—A. I am, Mr. Shaw.
Q. And you know that these Ministers of the Crown change pretty frequently
in this country? It is not a constant body?—A. J understand that.
Q. The gentlemen who compose the Treasury Board are not necessarily
financial men, or men who have a thorough knowledge of financial affairs. You
are aware of that fact? Our political system is such that that must be so?—
iA) Ved:
Q. Then you have discovered, I have no doubt, in your researches, an organi-
zation called the Canadian Bankers’ Association, which has certain disciplinary
powers in connection with the members of the organization?—A. In a manner, yes.
Q. And I suppose you have investigated also what we call the Central Gold
Reserve, which, as you are aware, is under the custody of a trustee for the
Government, and two trustees named by the bank. That is, three trustees alto-
gether?—A. Yes.
Q. And we are now trying to develop here some sort of an audit or inspection
system in the Finance Department. Heretofore we have had the Finance Depart-
ment which received returns from banks and compiled them, and gave them to
the public?—A. Yes.
Q. I do not want you to get the idea that we are trying to impose the Federal
Reserve System in this country, Mr. Pole, because that seems to be in your mind,
but what I want to ask you is this; supposing we had what we might call a central
bank, or—I am not particular about the name—call it a banking commission if
{Mr. John W. Pole.]
BANKING AND COMMERCE 139
APPENDIX No. 1
you like, which was charged not only with the duty of inspection or audit or
investigation or examination, or whatever you want to call it, independently of
the bank, but also had charge of the Central Gold Reserve, or the disciplinary
powers which are now given to the Bankers’ Association under the Bankers’
Association Act, and then were charged with the duty which now vests in the
Treasury Board, under the War Finance Act, would you think it would be desir-
able to have some central co-ordinated authority which would co-ordinate all
these different banking functions under the charge of a responsible commission,
banking commission or whatever authority you want to call it?—A. I was labour-
ing under the idea that the Minister of Finance was such an officer.
Q. You think he co-ordinates all these various activities?—A. I presumed
they were under his Department.
Q. Are you aware that in the case of a bank in difficulties, he has not any
more power in the matter than you have, so far as legislation is concerned?—
A. I did not know that.
Q. He has no power to close a bank. Then only closing of a bank which
comes by law would be like any other insolvent corporation?—A. Yes.
Q. And any power which he uses must be the power of persuasion?—A. Yes.
Q. I ask you, Mr. Pole, in view of the circumstances I have outlined to-day,
would it not be desirable to put in the hands of some central body, bank or
organization—I care not what you call it—a trained body of competent men,
experienced in all these banking functions, and in addition to that, perhaps in
time they would be the body which would issue notes for this country instead of
them being issued as they now are by the banks—not immediately, but perhaps
in the future?—A. I think it would be extremely desirable that a banking board
or bureau should be established, if it has not already been done.
Q. Charged with those various functions?—A. Charged with those various
functions. It would be highly desirable.
Q. I want to mention that to you because I think the impression has gone
abroad in the Committee’s minds that there are some here who want to establish
Federal: Reserve Banks. I am sure that is not possible, but I am interested in
trying to get some central place where we can fasten responsibility for all these
activities —A. I was under the impression that that would come under the duties
of the Minister of Finance to take care of all these situations.
Q. He is charged with matters of policy?—A. I presume, as far as his time
is concerned, that is so. I know that the Comptroller of Currency in the United
States has not the time to attend to all the banks, but he has assistants to whom
~ he delegates certain authorities wih respect to that.
Q. The point is this, that the Minister of Finance in this country is a member
of the Cabinet, and he must be in Parliament four or five months out of the year.
He is charged with matters of policy, but it cannot reasonably be expected, in
view of our political system, that he will be a financial expert, and it is impossible
for him to do all of this work.?—A. I understand that.
Hon. Mr. Stevens: That applies to every Minister of the Crown in every
activity of any kind. He is the nominal head and has responsible officials under
him to do the different kinds of work.—A. The Secretary of the Treasury in the
United States is responsible for all the operations of the Treasury Department,
but he has no time to attend to all the details personally.
By Mr. Shaw:
Q. He is not responsible to Congress——A. I should say he is responsible
to Congress for the operations of his Department.
Q. I ask you for your criticism of the suggestion which I have just made.
—A. I should say that it is a very valuable suggestion. As a matter of fact,
(Mr. John W. Pole]
1—22
140 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
to repeat what I said before, I was under the impression that the Minister of
Finance was in charge of just such duties as you outline, and that the Banking
Bureau was already established, and was operating under his jurisdiction.
Q. Take for instance, the advances under the War Finance Act. Do you
think it is desirable that this should be under a body of trained men, where
there is the right and the power to slide the interest rate as you mentioned
yesterday ?—A. Yes.
Q. That is desirable, because it will either prevent inflation or deflation.
—<A. I am assuming a proper and careful administration of the Finance Act.
Q. But as you know, the interest rate has been stationary, as you have
already suggested, in practice?—A. Yes.
Q. Do you think that advances under the Finance Act should be made in
the light of the inspection reports available to the Finance Department, or to
a department of any kind?—A. The Federal Reserve System is basing its opera-
tion upon the reports of the bank, which are made by the Comptroller of the
Currency.
Q. You have already mentioned that the inspection co-ordinated with the
Federal Reserve System?—A. Yes, the Federal Reserve Banks base their
advances upon the information which may be found in the report, in addition
to the analysis of the paper itself when offered for discount.
Q. In the suggestion which I offered you, I suggested that the Inspection
Department, or Examination Department, or whatever you care to call it,
would also be under the control of this central body, so that the financing
under the Finance Act would be met in the light of the inspection reports?—
A. I would say that that would be one of the functions of the Bureau, by all
means.
By Mr. Ladner:
Q. Mr. Pole, last year the Committee on Banking and Commerce con-
sidered in their limited way the question of a Central Reserve Bank, and at
that time I submitted a proposal which was filed as Exhibit 8 and which may be
found on page 254 of the report of last vear’s Banking Committee. This pro-
posal was submitted in connection with the establishment of a Federal Reserve
in Canada. Have you read that proposal by chance?—A. I have not.
Q. Then I want to go over some of the principles which I considered at
that time applicable to Canada, principles taken from the United States
system, but not all of the principles of the United States system, because all of
them are not applicable to Canada. Mr. Shaw has covered a number of these
in his questions, so I will skip those he has covered. The proposal which I
filed last year under the heading of ‘“ Proposal for a Reserve Bank of Canada”
has a subheading—“ Operation.”
“The Federal Reserve Bank should exercise the following func-
tions: —
“ (a) To act as a bank of rediscount dealing only with banks.”
That is the one of the essentials of the Federal Reserve Bank?—A. Correct.
Q. Then
“ (b) To have the right of open market operations in much the same
way as it is now done by the Federal Reserve Banks of the United
States and for the same purposes.”
I do not know whether open market operations have been explained to the
Committee. Would you mind explaining what they are?—A. The open market
operations are operations whereby the Federal Reserve Bank may go into the
open market in New York or the large money centres and purchase bills and
acceptances for profit in order to employ its surplus funds.
(Mr. John W. Pole.]
BANKING AND COMMERCE 141
APPENDIX No. 1
Q. Then in the event of a member bank, or some other bank, charging too
high a rate of interest, has the Federal Reserve Bank not the authority, after
notifying them, to go into that market and lower the rate so as to force the
banks to give a reasonable rate of interest?—-A. That might be done, it is done.
Q. In fact, the United States Federal Reserve Bank has that authority?
—A. Yes.
Q. Then
“(c) To act as a credit agent for banks in international banking in
order to facilitate trade and commerce between Canada and other parts
of the world, on much the same principle as the Bank of England.”
Would you mind explaining to the Committee how this is done in the
United States and Great Britain?—A. I am not familiar with the operations
in Great Britain, but in America the banks do a wide foreign business of
course; that is the banks in New York—
Q. The Federal Reserve Bank?
The CuHairMAN: Let him finish his answer.
By Mr. Ladner:
Q. The Federal Reserve Bank A. Does not enter into any foreign opera-
tions directly, except for the discounting of bills through its member banks.
Q. In international trade it is highly advantageous that function of the
Federal Reserve?—A. It is highly advantageous. It makes no distinction
between a foreign bill which is eligible and endorsed by a member bank, and a
domestic bill which is equally eligible.
Q. In that way, in foreign trading, it has an advantage over the system of
private banking?—A. The probability is that those banks which would discount
foreign paper of that class would have in its portfolio ample paper which it
might discount if it chose to do so, because these operations are conducted by
the very large banks, whose assets, generally speaking, are of a strictly com-
mercial character. :
Q. Then (d) is with respect to Note Issues and the operation of the Finance
Act, the Gold Security and Dominion notes. I think Mr. Shaw covered that.
We have had your opinion on that. Then
“(e) To act as bankers or fiscal agents of the Government.”
That is a function of the United States Federal Reserve Bank?—A. Yes, that is.
Q. How does that work out as regards Government financing, compared
with the old system?—A. I am advised that it is entirely satisfactory, and
operates at a great saving to the Government.
Q. Would you mind, in a few words, comparing the two systems?—A. The
old system of sub-treasuries—the notes which were issued to various sections
of the country, have all been taken over by the Federal Reserve Banks, and
the sub-treasuries, which operated at considerable cost have been discontinued.
The large volume of business which has been transacted by the Federal Reserve
Banks as fiscal agents, is due to the large issue of Government securities in the
shape of Liberty bonds, and that sort of thing, which, of course, was subse-
quent to the establishment of that issue; so that the fiduciary activities of the
Government have been tremendously extended since the establishment of the
Federal Reserve System.
Q. I have heard it said, and I would like to have your opinion on this, that
the appointment of a Board of Federal Reserve caused a sort of political rela-
tionship to exist during the war by which the rate of interest was kept up
artificially during the sale of Liberty bonds, in order that the Liberty bonds
age (Mr. John W. Pole.]
NIK
142 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
would be sold to a bank, and that when the war was over, deflation commenced
to take place and the Federal Reserve tried to lower the rate of interest and
the Liberty bonds sold at much less, so far as par value is concerned. That 1s
the story we heard?—A. I would not be prepared to express an opinion as to
the activities of the Federal Reserve Board in that connection. I know nothing
beyond newspaper reports on such subjects.
Q. Then (f) of my proposal deals with the question of profits. I believe
that under the Federal Reserve System the profits are limited to 6 per cent?—
A. The amount of profit which a Federal Reserve Bank may make? ‘There is
no limit to the amount of profit which a Federal Reserve Bank may make.
Q. But if it is over six it goes to the Government?—A. There is a limit
that they do make. The shareholders of the Federal Reserve Banks cannot
receive more than 6 per cent dividend annually, after which certain amounts
go to the surplus, and then the remainder goes to the Government, as a franchise
tax.
Q. Next (g) “To act as a disciplinary body for banks which might be dis-
posed to engage in questionable undertakings ”?—A. The Federal Reserve
Banks through their offices act in an advisory capacity to the banks.
Q. If they find a number of banks engaged in expensive and perhaps ques-
tionable financial undertakings, would they not have the authority to stop them,
to hold them back, or to correct them?—A. It would have none except as that
bank might be discounting with the Federal Reserve and it would affect the
value of the operation. That would be the function of the Comptroller of Cur-
rency, to discipline the banks. It is not the function of the Reserve Bank,
except to lend money on safe securities.
Q. Clause (h) deals with the question of inspection, and we have had that.
—A. Yes.
Q. The last clause (i) was covered by Mr. Shaw. It deals with the ques-
tion of a central bank taking over the duties of the Treasury Board and the
trustees of the Gold Reserve and the operations under the Finance Act of 1914.
Now, I understand that you are of the opinion that you could not put a Federal
or Central Reserve System in Canada? Do I understand that correctly ?—A.
That a Federal Reserve System, as operated in the United States, would not be
well adapted to the banking system which prevails in Canada.
Q. Because the two systems are fundamentally different; the one is a
branch system and the other an individual bank system?—A. Precisely.
Q. Could not this be worked out to the advantage of Canada. Could we
not take those principles from the Federal Reserve System which are applic-
able to Canada, and which have been enumerated?—A. I would think that that
would be entirely feasible under the control of this Board which you referred
to, and under proper administration.
Q. You told us yesterday that unless the National Banks were able to
engage in the branch business, the Federal Reserve Board could not continue?—
A. I think you did not exactly get me on that.
Q. I made a note of it, and the note I have is to the effect that the branch
bank business was subject to the continuance of the Federal Reserve Board
because the National Banks changed to the State Banks in order to get the
rates in that way?—-A. I say that the National Banks’ membership in the
Federal Reserve System is necessary to its existence.
Q. Did you not also tell us that it was essential if the National Banks
engaged in branch business, for the Federal Reserve System to continue?—
A. No, I said that they have equal opportunities of competition with the
State Banks and that they should have branch banking privileges within the
city in which they were located, but not outside.
{Mr. John W. Pole.]
BANKING AND COMMERCE 143
APPENDIX No. 1
Q. Why not outside?—A. Because it is a Unit System of banking. You
are getting into the question of branch banks now. It is entirely regarded as a
monopolistic system, and not adapted to the United States. The Unit system
of banking is in vogue, and it suits the American ideas of local self-government
far better than the branch banking system, although there are advocates of
the branch bank system in America, plenty of them.
Mr. McMaster: You mean that part of America known as the United
States?
Wirness: I beg pardon, yes.
By Mr. Ladner:
Q. Do you not think that taking the Canadian banks with their branches,
and taking the banks under the Federal Reserve System in the United States,
we could work out a system of a central or federal reserve board, to perform
those functions, and do you not think it would be an advantage to Canada, and
would not be too expensive?—A. I do not think there can be any question but
that this board of control under some officer—I thought it was the Minister of
Finance—might undoubtedly select very many clauses of the Federal Reserve
System in a general way which could be made applicable to your system of
banking in Canada,
Q. And not superimposing upon the Finance Act and the Treasury Board,
and these things, but co-ordinating with these things?—A. Yes, although I would
say that the probability is that under such a system that system which you are
suggesting would absorb all these functions under which the Finance Act was
operating.
Q. Now then, do you understand the situation of the Receiver General’s
office—A. I do in a general way, yes.
Q. Could we not take almost the entire machinery which we have now
operating through the Receiver General’s office, and co-ordinate that into a
system of a Central or Federal Reserve Board with very little additional
expense?—-A. Are you not coming back to precisely the operation of the Finance
Act?
Q. No, I am coming to a question of expense. Can you see, at the moment,
any great additional expense to the banks or the country?—A. Well, I visualize
the operation of the Finance Act, in your suggestion there.
Q. With further powers?—A. With further powers.
Q. Can you see any great expense that would be involved in such a
procedure?—A. I can see that the expense might be very great, or it might
be limited to the necessities of the case.
Q. It could be limited to the necessities?—A. I should say that it could
be limited under such a plan.
By Mr. Marler:
Q. Mr. Pole, there are a couple of questions I would like to ask you. You
spoke about the American units banks being alowed to make loans on real
estate, and you stated that in the United States there was always a market for
loans on real estate. What did you mean by that? That these loans could be
readily sold once they were negotiated by the banks to others?—A. Yes, there
are mortgage companies, and insurance companies, as a general thing, who
are always glad to get loans which are made on a basis upon which National
Banks are permitted to make them, which bear a nice rate of interest. It is
regarded as quite readily negotiable.
Q. Having regard to our Branch System of banking, would you consider
it wise for our banks to have such opportunities for investments? Or let me
put the question in another way. Do not these loans in real estate more or less
(Mr. John W. Pole.]
144 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
tie up liquid capital?—A. It depends, of course, on what relation they bear
to the deposits which are other than demand deposits. It strikes me, however,
that the making of such loans with a Federal Farm Loan Bank or such an
agency, if it might be established in Canada, would be preferable to letting
your banks go into the real estate loan business.
Q. In other words, it is not strictly the function of banks, under our
system, as far as you can see?—A. It is not.
By Mr. Maclean:
Q. But it is in the States, under their system?—A. It is not. It is per-
mitted, but the wisdom of too much real estate in the banks is very much
questioned by conservative bankers.
By Mr. Marler:
Q. Now, Mr. Pole, we have discussed at great length the question of a
‘Federal Reserve System in this country, and you read a very clear statement
this morning. I want to ask you one or two questions in regard to this. You
have gone over carefully the Finance Act and explained it to us; you have gone
very carefully into the system of Branch Banks in this country; can you see
any advantage, in so far as our Branch Bank System here is in vogue, in having
a Federal Reserve System similar to or akin to that in the United States?—
A. Assuming the functioning of the Finance Act on proper administration, I
should see no particular advantage.
Q. Now, the question was brought up by Mr. Shaw as regards a central
bureau of inspection. Is that the way you put it?
Mr. Suaw: No, I said a banking bureau, or a banking commission.
By Mr. Marler:
Q. Very well, a banking commission with the right to make inspection. We
took up yesterday and the day before the question of bank inspection and you
also read us a statement this morning. That defines the question, as you are
aware, of interior inspection and a kind of audit and the various other matters
which came up in that respect. I understood you very clearly to say, did I not,
that that inspection, coupled possibly with a small bureau to collate, bring
together and re-inspect these reports would, in your opinion, be a perfectly safe
system of inspection in so far as the depositors are concerned?—A. I intended
to convey that idea.
Q. In other words, you are quite positive on that subject?—A. I am quite
sure.
Q. Can you see any particular advantage of a further issue of notes?—-A. I
do not know what the requirements of the country are, but I understand there
is no shortage of a circulating medium in Canada; and that being the case,
there would be apparently no necessity for a change.
Q. In other words, the creation of a Federal Reserve Bank, or any bank
of that description, would not increase the circulation in any way to assist the
commerce of the country?—A. Under the Finance Act, I presume it amounts
to an additional issue of Dominion notes secured by collateral other than gold.
Mr. MAcLEAN : But these Dominion notes disappear and bank notes come
into place. That is the tragedy of the situation. We have seen it time after
time.
By Mr. Marler:
Q. We are questioning as to whether the bank notes’ circulation is sufti-
ciently liquid or not. That is the question I asked of the witness, and I think
his answer to that was ‘“ Yes.”
(Mr. John W. Pole.)
BANKING AND COMMERCE 145
APPENDIX No. 1
Mr. Suaw: He said he was told. Perhaps he would tell us the source of his
information.
Mr. Marurr: Mr. Pole has gone-very carefully into this system in vogue
here at the present time.
Mr. McMaster: Whom with?
Mr. Maruer: With himself. He has made up his own mind, and he seems to
have drawn very fair conclusions. He seems to have a very firm grasp of the
situation.
The CuHairMan: I do not think it is fair to ask where Mr. Pole got his
information. The Committee can judge if it is information he has given to the
best of his ability.
Mr. Coote: I want to suggest that Mr. Marler should question the witness
as expeditiously as possible. You suggested we adjourn at 12.30, and that Mr.
Good and Mr. Cahill would have an opportunity of asking questions.
By Mr. Good:
Q. Mr. Pole, I think there has been some misunderstanding regarding the
application of the Federal Reserve principles to Canada. I want to state for
your information that I have never heard any proposition here as to super-
imposing upon the present machinery which we have for discounting, and so
on, but there has been a definite proposition, as Mr. Ladner has stated, last year,
which has not received much consideration as yet, for the co-ordinating of the
re-discounting facilities under the Finance Act, or inspection, or whatever it
may be, of a public character—and outside inspection, the disciplinary powers
of the Canadian Bankers’ Association, and the operation of a Central Gold
Reserve. I would like you to again state whether or not you concede that that
co-ordination might be a very profitable thing for Canada under the circum-
stances?—A. That a system of examination as outlined in my remarks would
be a profitable thing?
Q. Yes, that system of examination of the simultaneous and co-ordinated
management of the Finance Act—the administration of the Finance Act, and
the administration of a Central Gold Reserve, and possibly any disciplinary
powers which are now exercised by the Canadian Bankers’ Association. Would
it be in the interest of Canada that these various functions now performed
separately should be co-ordinated under one central board or commission or
bureau?—A. I should say that with the possible exception of the Gold Reserve,
a bureau which performed one of these functions would perform the others, and
that such a bureau, which I was rather under the impression was in existence,
should certainly be created.
Q. I desire to follow Mr. Shaw’s question by putting a special case. Sup-
posing a Canadian Bank which is not subject to governmental inspection—take
the Home Bank—had applied to the Treasury Board for advances under the
Finance Act, and supposing the only statement that the Treasury Board had
access to should not reveal the condition of that bank, or if so, supposing the
officials of the Treasury Board were not capable of interpreting that statement,
and heavy advances were made to an insolvent institution. Would that be
injurious, in your judgment?—A. I should say that the Finance Board would
be subject to censure for knowing little or nothing about the bank to which it
was making advances, and I think that primarily the security to which the
Finance Act looks, would be that which was offered by the bank, although
coupled with that it would be very necessary for the Board to be informed as to
the conduct of the affairs of the bank.
(Mr. John W. Pole.]
146 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Then would it be advisable, in your opinion, that those in charge of the
rediscounting process, or the advancing of money under our Finance Act, should
have some pretty definite knowledge of the bank’s condition, the condition of
the bank making application for a loan, and the management of that bank?—
A. I think it would be quite essential.
Q. That the inspection service and the administration of the Finance Act
ought to be, in your judgment, coupled very closely?—-A. Very closely, I think
the reports of examination which are made, with a careful analysis of all the
bank’s assets, together with comments on its management, and of its affairs in
general, should be accessible to those gentlemen who had authority over the
making of these advances to such banks.
Q. Do you think it highly desirable that the administration of the redis-
counting process should be in the hands of capable and experienced men?—A.
Decidedly.
Q. How far, in your judgment, is the present rather regrettable conditions
of the American and the Canadian banks due to the inflation which took place
during the years from 1916 to 1920, and the subsequent deflation? How far has
that been a factor in the present unfortunate condition?—A. Undoubtedly a
very large factor. The fact also of injudicious banking enters into it, in that
it has not been able to see far enough ahead, and these fallen prices have been
taken advantage of without being able to see the results of this tremendous
rise in prices.
Q. Would it therefore conduce or contribute to the stability of our banking
institutions, generally if those periods of inflation and deflation could be con-
trolled; if we could get greater stability in the price level?—A. I think that
would aid greatly any banking system, the stabilizing of credit.
Q. Would it therefore protect the depositors if the general price level
could be stabilized. What I mean is, if the stabilizing of the price level would
contribute to the stability of the banks generally, would it therefore contribute
to the safety of deposits and depositors?—-A. That is an economic question which
it is very difficult to answer, but I should answer in the affirmative.
Q. Is it a function of the present Federal Reserve Board in the United
States to so regulate the interest rate or the rediscount rate, that a greater
stability, of stabilization of the price level may be secured?—A. Of interest
rates?
Q. Inflation and deflation—that is what I mean?—A. That is a factor
which is taken into consideration.
Q. Would it be possible for that particular regulation to take place or be
carried into effect, if you had not a Central Bank? Take the condition prior
to the establishment of the Federal Reserve System and Board; was it possible
then to regulate the interest rate in the direction of stability as it is now?—A,
It was impossible under those conditions. Of course, under the present condi-
tions, the Federal Reserve Banks make their own rates with the advice of the
Federal Reserve Board; and the rates in one Federal district may differ from
those in another, although in practice it is found that the difference is very
slight, that the prices are pretty well stabilized.
Q. The Federal Reserve Board more or less represents the public in the
United States, does it not?— Does it represent the banks, as distinguished from
the general public, or the public, as distinguished from the banks?—A. It
represents the public.
Q. And therefore the Board is supposed to act to the best of their ability
in the interests of the public?—A. Correct.
By Hon. Mr. Stevens:
Q. Appointed by——A. The President.
{Mr. John W. Pole.]
BANKING AND COMMERCE 147
APPENDIX -No. 1
By Mr. Garland:
Q. On the advice of anybody?—A. No.
Mr. Goop: One or two questions have been handed to me by Mr. Coote,
but I would prefer to allow him to put them to the witness.
By Mr. Cahill:
Q. Mr. Pole, do you think that the present banking system in vogue in
Canada is susceptible of competent government inspection?—A. I feel that way,
with certain additions to the system.
Q. I understood you to say that a Federal Reserve System would not dove-
tail in with our present system in Canada. Would you express an opinion as to
which system is preferable, having regard to the safety of depositors and service
to the country, the Branch Bank System, as in vogue in Canada, or the local
system as operating in the United States?
The CHAIRMAN: May I suggest that you add to that question “ having
regard also to the conditions in the United States and conditions generally in
Canada’?
Mr. Cantu: I prefer to ask my own questions in my own way.
The Witness: That is a large question.
Mr. McMastrr: I suggest that the witness allow no national modesty to
interfere with a frank expression of opinion.
The Witness: It is such a very wide question, as to whether Branch Bank-
ing or the Unit System of banking would be preferable, or better adapted to this
country, that I could hardly express an opinion on such short notice.
Mr. Ryckman: You have both systems in the United States.
Mr. Cantu: Is Mr. Pole to appear before the Committee at a later date?
The CHarrMAN: I am afraid not. He has to return to New York this
evening.
Mr. Cantu: Perhaps he would be willing to give us an answer in writing
at a later date.
The Cuatrman: If the Committee is agreed, I have no objection to asking
Mr. Pole, if he feels that he can do so, to put his answer in writing, and make a
written statement to the Committee in respect to the question put to him by Mr.
Cahill.
Mr. Maruer: We would have no opportunity of examining Mr. Pole on that
subject. There are dozens of questions that we might ask him which would
enable him to more intelligently prepare an answer of that kind. He might
arrive at an entirely erroneous opinion.
The Witness: May I ask you to repeat that question. I understood the
question to be “Is the Branch Banking System better adapted to the scheme
of things as used in Canada than would be the Unit System of banking ?”
Mr. Cant: That is about it, having regard to the service to the com-
munity and the safety of depositors.
The Witness: It is entirely possible that a Branch Banking System might
be well adapted to the needs of the country.
By Mr. Cahill:
Q. What is your opinion as regards the United States? Do you think the
Branch Banking System, as we have it here, would accommodate the American
public as well as the present American system?—A. Nothing like as well.
(Mr. John W. Pole.)
148 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Coote:
Q. Would you like to see, Mr. Pole, the United States limited to fourteen
banks, and four of these banks controlling 70 per cent of the deposits of the
United States?—A. By no means, because if there were four banks controlling
the deposits of the United States, it would probably result in one man con-
trolling all four, and the position would be entirely distasteful to the American
public to have the control of the finances in the hands of one individual man.
Q. It is easy to suppose then that such a system in Canada might place
the financial control of Canada in the hands of one individual?—A. I can see
the danger of that.
Q. And if that were done, do you think it would be in the interest of
Canada—if that should occur?—A. There would be danger attending such a
principle.
Q. Now, Mr. Pole, would you give me your opinion as to whether a bank
clerk from New York would be capable of managing a country bank in the
Western States?
The CuatrMANn: Do you think it is quite in order to put that question?
Mr. Coote: Mr. Pole does not need to answer it, if he prefers not to. I
am not elaborating on the question, because the time is very limited.
The Witness: As a general proposition, no.
By Mr. Coote:
Q. Under the United States System, do you have in some cases five banks
in a town with a population of from 1,500 to 2,000 people?—A. There are a
few cases.
Q. It is not general?—A. Not general, although competition is quite rife.
Q. Would you care, just giving your own opinion, to live in a town where
there was only one bank, and where the control of that bank was exercised 2,500
miles away, that being the only place in which you could do banking business?
I will put it another way, would you feel that you were under a disadvantage
under such a system as that, compared with a system under which you have a
bank under local control?—A. I think that the preference is greatly in favour of
the bank which is under local control.
By Mr. Ladner:
Q. Have any profits been turned over to the Government by the Federal
Reserve Board since its inception, and if so, can you give us an idea of the
amount?—A. $135,000,000.
By Mr. Healy:
Q. I understand that you are going to give us an answer comparing the
branch bank system with the Unit system?—A. I did do so.
Q. Well, having in mind that you have both systems in the United States—
when I make that statement I am referring particularly to your fifth largest
bank which operates in the State of California and also in the New York district,
the Bank of Italy—having in mind both systems, can you give us your opinion
as to how they work in the United States and as to which is the better for the
people?—A. Branch banking in the United States operates on an extensive scale
in that portion of the State of California, and the largest of the banks in Cali-
fornia having branches is the Bank of Italy. The Bank of Italy has acquired its
branches so very recently that it would be difficult to say as to the satisfaction
with which it has operated. I do know that there has been a good deal of
complaint as to the method whereby those branches have been obtained. The
Bank of Italy has been accused of going into the small towns which had banks
(Mr. John W. Pole.]
BANKING AND COMMERCE 149
APPENDIX No. 1
supervised by high class local men and hiring out of those banks employees at
very largely increased salaries, so that it made it almost impossible for the
local bank to function. The Bank of Italy’s branches might function at a very
serious loss locally, but it would make no difference to the Bank of Italy,
because it would be only for a short time. The Pacific Southwest, which is
probably the second largest branch bank in Californa, is surrounded with more
or less the same conditions, and is accumulating branches very, very rapidly,
but none of them have been in operation long enough to enable me to express an
opinion as to how satisfactory they may operate.
By Mr. Ryckman:
Q. What is your view as to the Bank of Italy invading the New York dis-
trict? How is that looked on in the United States? It is becoming a national
system as soon as they cross the continent?—A. International.
Q. National—A. International. I think that is the ambition. The Bank
of Italy has already its connections in New York, and the stock of the Bank of
Italy and its various affiliations is in the hands of a holding company very
frequently, but if the Bank of Italy expects to continue as a member of the
Federal Reserve System it cannot acquire any more branches, because that would
not be permitted by the Federal Reserve Board.
By Mr. Euler:
Q. Why ae you call it “International ”?—A. Because from the standpoint
of ambition, it is. 1 understand Mr. Gionninni wants to make his bank not
only cross the American continent, but to go to Italy and other countries.
Mr. Macurean: It is not international as far as Europe is concerned.
By Mr. Ryckman:
Q. No, it is American entirely?—A. Entirely.
The CuHarrMAN: I am sorry to say that we will not have the pleasure of
having Mr. Pole here again, because the sitting this afternoon will be more than
taken up by Mr. Wiliams’ evidence, and Mr. Pole has to leave to-night. I think
I voice the sentiment of the Committee in expressing to Mr. Pole our most
sincere gratitude for the willingness with which he has come from Washington
to Ottawa to give us his valuable opinions, in respect to the system that prevails
in the United States, and may I also express through him to the Honourable
Mr. Mellon, the Secretary of the Treasury of the United States, our gratitude
for having suggested his name, and allowed him to come.
Mr. Pore: Mr. Chairman and gentlemen, I should like to thank you for the
uniform courtesy with which I have been received here. I have enjoyed my visit
to Ottawa very, very much, and I thank you.
EXHIBIT No. 6. The Federal Reserve Act as amended to 1923, filed by
witness. (Not printed.)
The witness retired.
The Committee adjourned.
The Select Standing Committee on Banking and Commerce resumed at
2 p.m., Mr. Vien in the Chair.
The CuHatrmMan: Gentlemen, we have the pleasure of having with us
this afternoon, the Hon. J. Skelton Williams, formerly Comptroller of Cur-
rency in the United States from 1913 to 1921. He was for more than thirty
years Director, Vice-President, President and Chairman of Trust Companies
and banks, both National and State, in the South, Baltimore and New York
[Mr. John W. Pole.]
150 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
City. He was President and Chairman of the Trust Company Section of the
American Bankers’ Association; a member of the executive council of the
Bankers’ Association; and for eight years was First Assistant Secretary of the
Treasury, and Comptroller of the Currency. About twenty-eight years ago he
became president of a railway company in the South. Three years later he
planned, organized and was President of the Seaboard Line, aggregating 3,009
miles of railroad. He retired from the management in 1904. Three years later,
when the property got into difficulty following the panic of 1907, he was urge:
to return and participated in its affairs, aiding in its reorganization and he made
a success of it to such an extent that the floating-debt creditors were paid in
full without assessment to the stockholders, and the credit of the company was
fully restored. He retired from the membership of the Board of Directors a
few months before going to Washington in 1913. In 1913, he accepted from
President Wilson and Mr. McAdoo the office of first assistant-secretary of the
Treasury, and he was designated by the President as acting-secretary of the
Treasury in the absence of Secretary McAdoo. When first offered to him, he
declined the office of Comptroller of the Currency, but later on accepted it when
it was offered a second time, and became an ex-officio member of the Federal
Reserve Board. ;
In 1917, when the railroads were taken over by the Government, he was
appointed by the Director General McAdoo director of the Division of Finance
and the Division of Purchases, until 1919, when he resigned. He was in 1918
a member of the Capital Issues Committee, and as such approved or rejected
applications for the issuance of new securities.
I am sure, gentlemen, that I voice your sentiment in expressing to Mr.
Williams our heartiest welcome, and in thanking him for having taken the
trouble to come to Ottawa to give us his valuable assistance in the elucidation
of the problems that we have to study in the present session of Parliament.
We are very sorry indeed that Mr. Williams has found it impossible to give
us more than the afternoon. He is obliged to return by the train leaving Ottawa
at 5.25 p.m.; and I would therefore suggest that he be allowed to make his
statement without any interruption whatever. It will, I think, assist him and
assist the Committee if he is allowed to do so, and if there is any time avail-
able, I am sure that Mr. Williams will invite questions that may suggest them-
selves to hon. members.
Mr. W. F. Macuean: Perhaps he might be able to complete his statement
and give us an hour for questioning.
Hon. JOHN SKELTON WILLIAMS called and sworn.
Wrirness: I wish to thank you, Mr. Chairman and gentlemen, for your
generous introduction and also for the privilege which you have given me of
making an uninterrupted statement in regard to the matters about which you
wish me to talk. I wish to say that I will be very glad if any one who cares
to ask me any questions at any point of the statement, would do so, because
you will not in any way disconcert me by asking for any further information
on any point which I do not make sufficiently clear to you.
As I understood the telegram which I received from you, Mr. Chairman,
at Richmond, a few days ago, you desire me to give some testimony or evidence
in regard to the system of bank examinations as they were conducted in the
United States during the period that I was Comptroller of Currency and ex-
officio a member of the Federal Reserve Board. At the time I went to Wash-
ington, I held the position of First Assistant Secretary to the Treasury, and
as such, had supervision of all the fiscal bureaus of the Government, including
the office of the Comptroller of Currency, and the office of Director of the Mint,
(Mr. J. Skelton Williams.)
BANKING AND COMMERCE 151
APPENDIX No. 1
and other fiscal bureaus. As First Assistant Secretary to the Treasury, I took
an active interest in the matter of administering the Comptroller’s bureau, for
the special reason that the former Comptroller resigned soon after the present
administration took charge, and there was a vacancy in the office from the
time of his resignation until February, 1914. In that interval the Federal
Reserve Act was passed, and under the Federal Reserve Act the duties of the
Comptroller of Currency were enlarged. Th Comptroller of Currency, besides
the duties which had formerly devolved upon him, became a member of the
Federal Reserve Board. It was after the passage of the Federal Reserve Act
when the Comptroller of Currency was made ex-officio a member of the Board,
that I was again offered the position of Comptroller of Currency and I accepted
the office. Prior to the passage of the Federal Reserve Act, the system of
bank examinations in the United States was very ineffective and inefficient.
One of the objections to the methods then in vogue was the fact that the bank
examiners were paid on the fee system and not on the salary system; and
according to the provisions of that fee system, it became very much in the
interests of a National Bank examiner who was looking after his own comfort
and emolument, rather than after the welfare of the banks, to cut short some
of the examinations and perhaps linger on others. Under the old system a bank
with a certain capital paid a certain fee for the examination. For example, we
will say that a bank of a certain size was required to pay the examiner a fee of
$25. It might be that one bank with a capital involving the $25 fee would have
small assets, while another bank with the same capital might have assets five
times or ten times as great; but the tendency among the examiners was some-
times to shirk their duty and responsibility. As a matter of fact, there was a
rumour when I went to Washington that a bank had been known to be examined
by telephone. There were no telephone examinations under the new order of
things, I can assure you. Under the system which has prevailed since the
inauguration of the Federal Reserve System examiners are all paid on the
salary basis. The salaries range from $2.400 a year to $16,000 or $18,000 a year,
which is the salary paid in New York City.
By Mr. W. F. Maclean:
Q. He gives all his time?—A. The examiner gives all his time to the
service., I think that the chief examiner of the New York district is the
only one who gets as large a salary as that. Other salaries for the large cities
range from about $7,000 or $8,000 up to $12,000 or $13,000. At the time we
took charge of the Comptroller’s office there were field examiners only. I think
there were something like 100 or 120 field examiners. These examiners were
assigned to certain special districts. They were expected to examine all the
banks in their respective districts twice a vear. The districts were mapped
- out by the Comptroller’s office in such a way as to make it possible to have the
examinations made as prescribed by law, two examinations a year. When the
Federal Reserve Act was passed, or soon thereafter, I put into effect a some-
what different system. I divided the National Bank examiner force into 12
districts which were co-terminus with the 12 Federal Reserve districts;
and in each of those 12 districts JI appointed a chief examiner, to
whom the field examiners of the district made their reports. As a result of
having those 12 districts in New York, Boston, Richmond, Dallas, San Francisco,
Chicago, and the other Federal Reserve cities, we had a very much closer super-
vision of the National banks than was possible under the old plan. Those field
examiners in making their examinations of the banks would send a copy of
their report to the chief examiner in San Francisco, Dallas, Minneapolis, or
whatever it might be; and would also send a copy of the same report to the
home office or the Comptroller’s office. When the report from the field examiner
Py (Mr. J. Skelton Williams.]
152 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
reached the Comptroller’s office it was digested in one of the six divisions
in which the Comptroller’s office is divided, namely, the Examiner Division—
perhaps it would be well to say right here that the Comptroller’s bureau has
five or six separate divisions—a division of examination, a division of statistics,
the insolvent division having to do with failed and liquidating banks, the organi-
zation division having to do with the organization of new banks, the consolida-
tion of banks; and a book-keeping division, the chief clerk’s. Each of these
divisions in the Comptroller’s office has a head or chief of division, and they
report to the Deputy Comptroller and through him to the Comptroller. In the
examiner division the report of the field examiner is analyzed. Violations of
the law are noted, laxity or loose management, and a letter is then prepared
and sent direct to the bank on the examination. In writing to a National Bank.
through the Comptroller’s office as to derelictions or infractions of the law, or
loose methods, it is customary for the Comptroller to instruct the bank to which
the letter is addressed to read the letter to its board of directors before the
next meeting and to reply and to have their reply sanctioned and approved by
their full board. In addition to the field examiner and the chief examiner it
was found desirable a few years before I resigned from the office to have what
we call supervising examiners also. Those were examiners at large; perhaps
four to six supervising examiners, each to have charge of from one to three of
the main districts, the 12 districts into which the country is divided. Those
examiners, in addition to making examinations of banks, were expected to super-
vise the examiners themselves and make reports to the Comptroller as to the
efficiency or merit or demerit of the different examiners with whom they would
be thrown into contact. It was a kind of check on the examiners as well as
on the banks.
That is briefly the system of National Bank examination as practiced
during the seven years that I had the honour to hold the office of Comptroller
of Currency. I do not suppose that it would be worth your time for me to
go into detail as to the methods of the examiners in conducting an examination,
but I will say this, that those examinations were very thorough and very
impartial. I have reason to be proud of the young men whom I was fortunate
enough to have in the Comptroller’s bureau to help me during those seven
disturbing and nerve-racking years, from 1913-14 to 1919. Every examiner
was given to understand that he had to report to no one but the Comptroller
of Currency, and that there was no one to give him any instructions or turn
him aside from his task except the Comptroller. They also knew that as long
as they did right and were fearless in the discharge of their duty they would
have the unqualified support of the Comptroller. I ascribe to that fact largely
the success that we met with in examining banks and keeping them in a clean
and strong condition during those years. There was no political influence, or
any other influence that could turn an examiner aside or make him deviate a
hair’s breadth from the line of duty in making his examination of any bank.
That condition of things would have been impossible if it had not been that I
had the good fortune to have the absolute support of President Wilson and
Secretary McAdoo. President Wilson and Secretary McAdoo wanted to have
the banks kept in a clean and strong condition, and there was no political
influence which caused them to suggest for one moment that anything shoulc
govern the examination of banks except the highest standard of business
morality and ethics. We, of course, at some time had influences of one kind
and another which were not favourable, but it was not long before everybody
was given to understand and they learned that banks were being examined fear-
lessly and thoroughly. Now, as a result and fruit of that course of action and
of these principles it was my proud honour to be able to report to the President
in the year of 1919, shortly before retiring, that with eight thousand National
[Mr. J. Skelton Williams.] e
BANKING AND COMMERCE 153
APPENDIX No. 1
Banks, and more than twenty million depositors, and more than $22,000,000,000
of resources, there was not one dollar’s loss to any depositor in any National
Bank in the United States. Of course, the relentless discharge of the duties
which at times was difficult, and embarassing, antagonisms were created, and
there were a great many complaints of one kind or another which would be
made usually indirectly, but I also have the pleasure of stating publicly that
upon no occasion during those years was any complaint ever submitted to the
Comptroller’s office which showed any dereliction or failure to perform fear-
lessly the duties of that office by the Comptroller and those under him, in the
Washington office. I might mention in this connection that shortly before they
closed the Wilson Administration, when the President sent for the third time
to the Senate my nomination for Comptroller, there were political influences
which attempted to prevent my confirmation, and open hearings were held
by the Banking and Currency Committee of the United States Senate, and
it was a very great gratification to me to realize that notwithstanding the
repeated invitations to have the bankers of the country come forward with
any meritorious complaints against the Comptroller’s office, I do not think that
there were any executive of any National Bank of the United States who
dared to come forward and make a complaint in the open.
Document entitled ‘(Chart of Federal Reserve Districts” filed as EXHIBIT
No. 7. (Not printed.)
The Wirness: I will take the liberty of reading one or two extracts from
the Comptroller’s report for the year 1920 (EXHIBIT No. 8). I spoke just now
of the record of National Banks for 1919, and this is of 1920. (Reading) :—
“In the matter of immunity from failure the showing for the past
twelve months has been the best in about forty years, with the sole
exception of the fiscal year of 1919. The total capital of the five small
National Banks which failed during the year was $225,000, or 17/1000
of 1 per cent of the total capital of all National Banks. This percentage
is about sixteen times better than the average for any other period of
the fifty-seven years from the inauguration of the National Bank System
to the present time.”
One question would naturally arise is that while the system in opera-
tion seemed to work well in the interest of depositors in National Banks, it was
such an annoyance and such a harrassment and was so costly to the National
Banks that they were prevented from earning. We tried to be fair to both sides,
to take care of the depositors as well as the stockholders, and from a stock-
holder’s point of view this will be interesting:—
“The earnings of the National Banks both gross and net have sur-
passed all previous years. The net earnings for the twelve months end-
ing June 30th, 1920, amounted to $282,000,000, an increase of $41,700,000
over the previous year, and an increase which has taken place in the net
earnings of the National Banks in the past seven years has exceeded
by $18,000,000 the total increase in earnings shown for the forty-three-
year period from 1870 to 1913.”
That is a case where virtue was rewarded. So much for the result of the
discipline exercised by the Comptroller’s Bureau in the matter of protection of
depositors, as well as of the bank. Did banks grow in resources?
_ “During the last fiscal year the resources of the National Banks
reached the highest point in their history, being, on January Ist, 1920,
$22,711,000,000, showing an increase as compared with the report for
January Ist, 1919, of $2,600,000,000. In the six months following Janu-
ary Ist, 1920, the resources of the National Banks declined to
$22,196,000,000, at which figure they stood on June 30th, 1920.
(Mr. J. Skelton Williams. ]
154 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
“That is, in the seven-year period from June, 1913, to June, 1920,
the resources of the National Banks increased $11,159,000,000, which is
more than the total increase which took place in the entire fifty years
from the inauguration of the National Bank System in 1863 up to 1913.”
I wish to say, Mr. Chairman and gentlemen, that this success which
attended the administration and supervision of the National Banks was due
very largely to the directors of the banks themselves, because they were
informed and notified that they would be held responsible for the faithful dis-
charge of their duties, and if they were negligent, or inattentive or remiss, or
guilty of violations of the law, they would be held responsible for all losses
resulting to the bank, and in circulars and in communications from the bank
examiners, and otherwise, this duty was impressed upon the directors in a way
which they were not likely to forget. As an illustration of that, I will mention
the case of one large bank which I discovered, as the result of an examination.
It had been guilty of an infraction of the banking laws, and had made an ultra
vires investment. I sent for the President of the bank to come to Washington,
and called his attention to this unlawful investment which had caused a loss of
$1,000,000 or more to his bank. It had been made several years previously,
and he protested that he was not responsible for it, that he was not the Presi-
dent of the bank then, and he said, “ The other directors are not responsible
for this loss,” and he said, ‘“‘ There were only two of them who knew anything
about that.” I said, “ Who are they?”, and he mentioned the name of one of
them, whose name is familiar to all of you gentlemen, and the other is in
Europe. The first man he mentioned is now no longer living. I said, “I can-
not help that, the law has been disregarded, your directors ought to have known
about this whether they did or not, and I must ask you to pay back into the
bank’s treasury this loss.” There were some ameliorating circumstances; this
had happened a year or more before, so we finally adjusted the matter by taking
these conditions which he brought up into consideration, and we told him that
he might settle the matter by paying $500,000 into the bank’s treasury; so his
directors got together and out of their own pockets paid into the treasury of
the bank the sum of $500,000, and when I saw him a year or two afterwards,
before I left Washington—this was not a Washington banker—I said that I
thought that that investment which his directors had made of $500,000 was
probably the best investment that they had ever made. It was by lessons of
that sort that impressions were made upon the banks to try to uphold and
obey the laws.
By Mr. McMaster:
Q. Was there any penalty besides the restitution?—A. Not in that par-
ticular bank. Of course, there were a number of cases where bank officers were
convicted of various violations of the penal statutes, and were sentenced to
fines and imprisonment in some cases. I think it might be interesting to your
Committee if I should mention the case of a bank in New England which had
in its employ a man who was unworthy of the job which he held. Notwith-
standing the fact that the executive officers of the bank knew that this par-
ticular employee or officer was not a man of character, who could be trusted
they retained him in the employ of the bank, and presently he made away with
two or three hundred thousand dollars of the bank’s funds in one way or
another, and we had to bring suit against the President, claiming that he knew
that the man whom he employed was unworthy of confidence, and was respon-
sible for the losses resulting from his negligence, or worse. The case was carried
to the Supreme Court of the United States. Meanwhile, the President of the
bank died, and when the case was finally decided by the Supreme Court of the
United States, the estate of the bank president paid over to the creditors of
(Mr. J. Skelton Williams.]
BANKING AND COMMERCE 155
APPENDIX No. 1
the bank the sum of $300,000. The bank officers throughout the country knew
that the examinations which were being made were real ones, and that infrac-
tions of law were not going to be condoned or passed over lightly, with the
results which I have shown you. I think it is especially worthy of note that
these extraordinary results were due, as I say, to the officers of the banks them-
selves, because they looked after the banks’ affairs, and they tried to obey the
law, excepting a comparatively small proportion of officers who were unworthy
of the positions they held, and in many cases have paid the penalty already.
But the directors of these banks felt and realized they had a real responsibility,
and they tried earnestly to do their duty with the result that it aided immensely
in keeping our banks in a sound condition during the World War, and enabled
them to function 100 per cent at the time when it was more important than at
any other time of the world’s history that the banks should be sound and clean.
Now, I should say that from time to time the Comptroller’s Bureau would
send out circulars to the member banks, or National Banks, calling attention
to abuses of one kind or another which might be found to prevail among certain
banks, and they were admonished to prevent infractions of law and to improve
such conditions, if possible.
Q. It did not take you long to find these things out?—A. It did some-
times. Sometimes they were very skillful in covering them up, but we had
very skillful and able examiners and we went to the bottom of things, and
we had men who could not be turned aside from their duty by any threat from
any bank’s officers or any politicians or anyone else. I will say that the purpose
or object of the Comptroller’s office was to keep the banks clean and make
them obey the law, and there was no desire to revenge or punishment of the
guilty. On the contrary, there were rejoicings over the turning of a badly
managed bank in a well conducted institution, and there were many times when
banks were lifted from disaster by the hair of the head, almost. Some of
them were half drowned, and had sunk for the second or third time, and we
rescued them and restored them to life. There were a great many cases of
resuscitation of that sort which were never brought to light, and never
published, and we thought as long as there was life there was hope, and in
many cases we have been able by moral suasion and the exercise of care and
attention, to eliminate from National Banks unworthy officers and employees,
and put in charge men who were entitled to be trusted. The Comptroller had
no authority to remove bank officers. That was one amendment to the Bank
Act which I thought might have been considered favourably— the matter of
removing employees, but that had to be handled very delicately, but as it was,
there were many cases where banks which had gotten themselves, through
neglect of the ordinary practices of sound banking, into a wretched condition,
are now strong, flourishing institutions. I would say that the examiners were
kept informed from time to time from the Comptroller’s office, as well as we
could, with regard to the dangers that seemed to be ahead, or dangers that might
prevail in any particular district, and they were warned, and in addition to
that we would have meetings of the National Bank Examiners at the offices
of the twelve Chief Examiners, from time to time, and there these young men,
the field examiners, would be instructed in the duties of their profession and
were in a position to confer fully with their immediate superior officers, the
Chief Examiners, upon any matter upon which they desired light and guidance.
These group meetings, which were held from time to time, were very beneficial.
Also, the Comptroller met with the twelve Chief Examiners, and had conferences
with them. The affairs of each particular district would be gone over, points
of concern or danger discussed, and suggestions made for remedying them.
The result was that the Comptroller’s office was acquainted with conditions all
(Mr. J. Skelton Williams.]
1—23
4
156 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
over the entire country. Delicate and dangerous cases were not left to be
handled by either the field examiner or the Chief Examiner, but where a case
was particularly bad, we brought the President or other officers, or perhaps
several of them, to Washington for conference, where their troubles were dis-
cussed and efforts were made to remedy them, and to prevent the recurrence
of the abuses which had brought to them to an unhappy condition. It was by
this theory and these methods and by close following and close direction, and
close co-operation, as I say, of the directors of the bank, that we were able to
report in the year of 1919, as I have stated, that there was not one dollar lost
to any depositor in any National Bank in the entire country.
Now, Mr. Chairman, and gentlemen, if there are any points in connection
with the examination of banks upon which any member of your Committee
would like to have any further information, I shall be most happy to be
questioned.
By Mr. MacLean:
Q. Was that superior to a State Bank examination?—A. I do not like to
criticize our friends of the State Banks, but I have no objection to telling you
that when I was in Washington the feeling at that time was that the methods
of the National Bank examining forces were very much more successful in
preventing bank failures than the methods in vogue in some of the States. In
some of the States they had a very good system of State Bank examination,
but in other States their system of bank examination was a farce, and it would
surprise you to know that in some of the States where the system of bank
examination was less sufficient, you would have expected it would have been
more efficient. In other words, instead of examinations in some instances being
conducted upon a thoroughly business-like basis, the object being the keeping
of a bank in a strong, sound condition, the political influences crept in and inter-
fered not only with the efficiency of the examination, but the class of examiners
appointed to this delicate duty. I would say with regard to the appointment of
examiners during the time that I was in Washington that no political influence
could secure the appointment of any examiner, or the discharge of any examiner,
and it was that knowledge on the part of the examiners that they held their
jobs solely on their merits, to which I ascribe to a large measure the success of
our work. As a matter of fact I had the opportunity and pleasure of appointing
a good many examiners from the opposite party to that to which I belonged,
and I never discharged an examiner for a political reason.
By Min. Canills
Q. How long were they appointed for?—A. During good behaviour.
Q. They were not subject to dismissal by a succeeding government?—A.
They were subject to dismissal or change by the Comptroller of the Currency.
Q. Only?’—A. The Comptroller of the Currency.
By Mr. Shaw:
Q. You suggested that you were in favour of the Comptroller of the Cur-
rency having the right to remove bank officers?—A. I should say for proven
offences, for negligence, or derelictions in office.
Q. Now, sir, would you mind telling us what would be the Comptroller’s
action in the event that a bank was found to be either violating the law or
refusing to carry out your instructions? How would you give effect to your
action, if it became necessary to do so by reason of your power?—A. It would
depend to a large extent upon the character of the offence. The violation of
law of one kind would be handled one way, and perhaps another would be
handled in another way. Where a man was a persistent offender, or his
[Mr. J. Skelton Williams.)
BANKING AND COMMERCE 157
APPENDIX No. 1
breaches of law were flagrant there was a method by which we could have a
receivership applied for by process of court to have a bank, although solvent,
placed in the hands of a receiver.
Q. Could the Comptroller close the bank himself?—A.I have never
known a case of a bank being closed excepting for insolvency, by the Comp-
troller. Of course, a threatened insolvency and a continuous dereliction, or
violation of law would bring about the court procedure which I have suggested.
By Mr. Ryckman:
Q. Were any banks closed during your term of office?—A. Yes, I shall be
glad to show you what was done. In 1914, that was the first year, there were
twenty-one failures; the next year there were fourteen; the next year there
were thirteen; the next year seven; the next year there were two; but in the
year 1919 there was only one bank failed, which was paid out in full.
Q. How would you be able to do that without loss to the depositors?—A.
We realized a sufficient amount on the assets of the failed bank to pay the
depositors in full.
Q. And would you tell us how you so soon arrived at the point where you
could close a bank in order to protect the depositors?—A. When we found the
bank in an insolvent condition, unable to meet its obligations, we would appoint
a receiver. Receivers are appointed by the Comptroller of the Currency. I
would like to branch out, there for a moment, to say that a great deal of the
success in administermg a failed bank depends upon the character of the
administrator or the receiver, whether he is a man who knows his job, or whether
he does not. Great pressure was brought to bear upon us to put politicians in
there, men who were looking for jobs, but we refused to do that unless the
politician happened to be a man who was competent and efficient and honest,
and as a result of putting in trained men, and men upon whom we could rely
implicitly, we had a most extraordinary record, even in opening the few banks
which did fail, of administering the trust at a minimum expense. There is no
comparison between the expense involved in the administration of the National
Banks and some of the State institutions which have gone wrong.
By Mr. Euler:
Q. Have you the absolute authority to close a bank when you know it is
insolvent, even if it does not declare itself?—-A. The Comptroller of the Cur-
rency can exercise his discretion in that matter.
Q. Would you take the report of an inspector, or would these inspectors
know within a given time that a bank was insolvent?—A. The bank usually
knows when it can go on or cannot. When it cannot cash a cheque over the
counter, it is time to close a bank.
Q. But they may not declare themselves insolvent?—A. Yes, but we could
put a bank examiner in charge until they were justified in declaring they were
entitled to a receiver.
Q. Under your system you would find out that such insolvency existed?—
A. We think we would. We have been very successful in finding out.
By Mr. Cahill:
Q. And you have the authority to close a bank or put a receiver in charge
if you believe the bank insolvent?—A. Of an insolvent institution.
By Mr. Hughes:
Q. In the case of the banks you referred to as failing, had you to call for
the double liability of the shareholders, and particularly the ones where the
(Mr. J. Skelton Williams.]
1—23}3 ‘
158 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
deposits were paid in full?—A. We sometimes find this condition; that the bank
‘is absolutely insolvent on its present paid-in capital. We would assess the stock-
holders 100 per cent, or a fund sufficient in the judgment of the Comptroller to
restore it to solvency. If these people would then pay in their 100 per cent
investment, or such portion as might be called for by the Comptroller, the bank
might be permitted to continue in business. Of course it is conceivable that a
bank may be solvent—eventually solvent, and yet unable to continue in business.
In other words, they have not the cash resources to pay cheques which are
presented against them. I had a very curious case of that. I recall one occasion
of a bank which was atrociously managed by its president, and I appointed a
receiver to take charge of the bank and administer the bank for several years.
The administration of the Receiver was so successful that the depositors were
paid in full. I think something over $100 a share was returned to the stock-
holders.
By Mr. Garland:
Q. You told us that in the event of a bank being found in difficult cireum-
stanees, an assessment might be made on the shareholders, the amount varying?
—A. Not exceeding 100 per cent of the total stock.
Q. In that event, does that relieve the shareholders of that portion of the
double liability then paid in?—A. Yes.
~ -Q. It does?—A. Yes. The stockholders are only liable for 100 per cent
of that stock.
Q. The witness states that the bank may be permitted to continue business
with the impaired liability?—A. No, they cannot cut the capital. Say that a
bank has $100,000 of stock, capital stock, and we will say $400,000 of other
liabilities, making the total liabilities $500,000. Now, they lose by bad loans
$100,000 which wipes out their stock. We can call on them. Or we will say
it loses $200,000; we can call on them to put up 100 per cent. That enables
them to pay their debts in full, but of course, leaves nothing for the share-
holders.
By Mr. Shaw:
Q. Suppose that the bank you have mentioned goes on doing business, but
subsequently becomes insolvent, are the shareholders liable—A. Not for another
assessment.
Mr. W. F. Macugan: It is a limited lability.
By Mr. Good:
Q. Are your banks generally operated on the double liability scheme?—A.
All National Banks.
By Mr. Garland:
Q. Do I understand you correctly; perhaps I have not caught the point-—
do I understand that banks may be permitted to continue in business, having
met their liabilities under the proposed plan of the witness, even though the
total liability is impaired, indeed exhausted, it may be?—A. For the time being,
es.
‘i Q. In the event of a bank in the future running into difficult circumstances
it would not have the double liability reserve to fall back upon if it is exhausted’
—A. You can only assess them once.
By Mr. McMaster:
Q. Sir, there has been a suggestion made before this Committee that the
double liability provision was a deterrent to the placing in a bank of capital
and that therefore it was on that ground an unwise provision. We would like
{Mr. J. Skelton Williams.]
BANKING AND COMMERCE 159
APPENDIX No. 1
to have you opinion on that.—A. I think it has been a very excellent provision
to the National banks. There are some States that require double liability of
State Banks. I do not recall them at the present time. There are others that
do not require the double liability. I think it is a conservative safeguard.
By Mr. Benoit: 4
Q. Can you assess the double liability at any time?—A. Only once.
By Mr. Cahill:
Q. Having regard to the banking system in Canada with 4,000 or 5,000
branches, I presume you understand that we have 14 banks—-A. Yes. And
4,000 branches.
Q. Extending all over the country, some of them nearly 3,000 miles away;
do you believe that a system such as you have mentioned could be incorporated
in Canada to take care of bank inspection in Canada under the existing banking
system, and one that would be as efficient as the system you have just outlined?
—A. Well, perhaps you will permit me to answer part of that question first. I
am not prepared to say, without knowledge of the whole subject, as to the com-
parative efficiency which may be established in Canada as compared with the
efficiency we have in the United States; but with my knowledge of the Canadian
system, I see no reason at all why there should not be a system of independent
examination of your banks, which would be efficient and satisfactory, and would
prevent such failures as those that have sometimes occurred in the Dominion.
I should probably add to that statement the further statement that the establish-
ment of a system of that sort might involve some changes in the methods of con-
ducting your branches, so that when an examiner goes into a branch he could
examine that branch as a distinct and separate entity. As I understand it, the
suggestion has been made that when you are examining a bank which has a great
many branches, you cannot make a contemporaneous examination of all the
branches, that opportunity is given for the juggling of paper or the fixing of
accounts. I think it would be entirely possible for you to so amend your banking
laws, if it is necessary to them as to reduce the danger of shifting accounts and
balances to a minimum, so that when an examination is made cf a branch you
could tell pretty well whether it is a complete examination or whether the books,
accounts and affairs have been shifted to some other branvh main office. I think
it is entirely possible to put into effect in Canada with your 3,000 or 4,000
branches a system of examination without requiring a contemporaneous examina-
tion of all the branches. I have had experience in examining banks with branches
in Washington; not only branches in this country, but abroad. There was one
large bank in New York which has probably 30 or 40 branches in South America,
Cuba and Europe. I was able to make examinations of that bank and its
branches which were entirely satisfactory to the Comptroller’s bureau although
those banks were separated by 3,000 or 4,000 miles.
By Mr. McMaster:
Q. Would you indicate briefly the method you followed in that connection?
—A. The first thing was to have thoroughly trained and efficient examiners,
accustomed to the examination of banks, and who knew the points to be guarded
against.
By Mr. Cahill:
Q. They went to those branches?—A. They went to those branches. This
particular bank I have in mind had probably 50 branches in different parts of the
world. Mr. Pole occupied a very important post in the examination department
of the National Banking System, having charge as chief examiner of the Federal
Reserve District of Atlanta. He has had a wide experience in the matter of
(Mr. J. Skelton Williams.j
160 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
National Banks, and I was very glad when I read in the paper this morning
that he had had an opportunity of giving you the benefit of his knowledge and
experience.
By Mr. W. F. Maclean:
Q. A head office examination would give you a pretty fair idea?—A. To
show you what the examiners do sometimes and how much more examiners see
than directors hear about, I may mention the fact that we sent one of our
examiners upon one occasion to a large bank, and he had not been in there more
than three or four days before he called the Comptroller’s attention to the fact
that the bank had sustained a loss of $3,000,000, and they did not know anything
about it. The directors did not know anything about it, yet the examiner found
it out in three days.
By Mr. Ladner:
Q. Who did know about it?—A. The guilty officer.
Q. Was he a general manager or an assistant?—A. He was manager of a
department.
By Mr. Euler:
Q. It is a fact that the United States Government makes an investigation of
banks. Does that lead to any liability on their part to make gosd possible losses
by depositors?—A. You mean the United States Government?
Q. Yes?—A. None whatever. There is no responsibility upon the Govern-
ment to make good losses; the Government’s part is to prevent losses.
Q. But if losses do occur, the Government is not responsible for making
them good?—A. Certainly not.
By Hon. Mr. Stevens:
Q. We are interested particularly in studying the system of the United
States and comparing it with our own, having in mind the difference of the two
systems. May I refresh your knowledge of the system we have in Canada?—
A. I would be happy to have you do so.
Q. Under our system the auditors are, of course, appointed by the bank.
I will not read the whole section but only one or two portions of it, which will
refresh your knowledge.—A. I read your Bank Act yesterday.
Q. For instance, as to the manner in which the auditors are chosen, and the
improvement made in the Bank Act last year, I want to read particularly sub-
section 10 which appears to me to be really the most important paragraph of
section 56.
“10. It shall be the duty of the auditors to report individually cr
jointly as to them may seem fit to the general manager and to the direct-
ors in writing any transactions or conditions affecting the well being of
the bank which are not satisfactory to them, and which in their opinion
require rectification, and without restricting the generality of this
requirement they shall report specifically to the general manager and to
the directors from time to time upon any loans exceeding one per cent
of the paid-up capital of the bank which in their judgment are inade-
quately secured, but this provision shall not be construed to relieve any
director from the due and proper discharge of the duties of a director.
The report shall be transmitted or delivered by the auditors to the general
manager at his office and to each director at his last known post office
address and the said report shall be incorporated in the minutes of the
directors’ meeting first following the receipt of the said report.”
[Mr. J. Skelton Williams.]
BANKING AND COMMERCE 161
APPENDIX No. 1.
Having that in mind, together with the other facts in connection with the
audit, does there appear to you to be a fair and reasonable audit of a bank?—
A. It is all right so far as it goes.
Q. Very good. In addition to this you will of course recall that the banks
in Canada maintain an inspection service; that is, inspectors corresponding
somewhat in ability and in duties to the examiners of the United States Gov-
ernment?—A. Their own auditors.
Q. Corresponding so far as their technical knowledge or position is con-
cerned, but of course, employees of the bank. These inspectors go from branch
to branch throughout the country, and unexpectedly—invariably unexpectedly—
inspect those branches quite thoroughly—I may use the term more familiar to
you, they examine the banks most thoroughly. Having that in mind, plus the
shareholders’ internal audit and the fact that those reports have to be made
to the directors, do you not think that that is substantially a sound system of
inspection or examination of banks?—A. I do not think that any system of
examination which is controlled and directed from inside the bank can be as
effective, as complete and as thorough as an absolutely disinterested outside
‘examination by a Government agency.:
Q. It has been suggested by myself, and I am going to submit it to your
judgment, because of your wide experience, that in this clause where it is pro-
vided that the auditor shall make his report to the directors and general man-
ager and that a copy of that report shall be submitted to the Minister of
Finance—and when I use the name of the Minister of Finance .A You mean
a copy of the auditor’s report?
Q. Yes, that it shall be submitted to the Minister of Finance. That would
be an addition to or an extension of our present system. Now, with such an
extension, and having of course an officer qualified—we always assume that that
will be the case—would not that meet the possible lack which you indicate you
now see in our system as compared with your own?—A. I do not think that
that would be anything like as effective as if you would submit it to some bureau
or office under your Minister of Finance who is immediately charged with the
supervision of banks.
Q. That is exactly what he would be?—A. And who would have his
authority. to send his own independent man to check up that audit. Perhaps I
may be allowed to cover a point that I have not covered thus far: That is, the
National Banks are already being examined by committees of their own directors,
but it has been found that the examination by committees of their own directors
do not begin to take the place of examinations which are made by the Comp-
troller’s bureau.
Q. I quite understand. When I use the term “ Minister,” I use it just as
you would use the term “Secretary of the Treasury.”’—A. The Comptroller’s
bureau is a bureau under the Secretary.
Q. Undoubtedly, any system inaugurated would have to have the machinery
necessary and would have to have such an officer?—A. As I understand your
question, it was as to whether some auditors selected by the bank itself would
give as efficient an examination as auditors sent by the Treasury.
Q. Let me turn to one or two facts, and I do not want you to think that in
asking these questions I am reflecting on the National Banking System in the
United States; I am seeking for information?—A. I hope you will not feel any
embarrassment in asking any questions. I will answer any questions you care
to ask.
Q. I have a copy of Dun’s report of bank failures and it corroborates
your statement that during the 7-year period that you were Comptroller
(Mr. J. Skelton Williams.]
162 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
of the Treasury there was a very healthy condition in the National Banks.
That is shown in this statement. Subsequent to your retirement, I think in
1920, this report shows that in 1921 there were 47 failures of National Banks
and 357 State Banks; in 1922 there were 35 failures of National Banks and
242 State Banks; in 1923, 77 failures of National Banks and 501 State Banks.
and in the first 4 months of 1924 there were 64 failures. Now, I want to ask
you—A. Right there, from the figures you have just read 1t appears that there
were more failures last year than there were in the entire 7 years that I had
the honour of supervising the National Banks.
Q. Quite true?—A. You want to know why with a continuance of the
system of examination which was in force in those years there has been such
an outbreak of failures? ‘
: Q. I was going to put the question in this way, if you will permit me:
This is where I may be accused of having a little indelicacy in the question,
but I will take this opportunity of paying this tribute that I have read a good
deal about your record, and it has always been of the highest standard; so my
question is without prejudice to you. During the period of your incumbency
of that office, it was a period of inflation, a period of abnormal activity and
gradual expansion and inflation in every line of business including particularly
banking and finance. But the three years showing these failures have been a
period of deflation. Now, was the scarcity of failures in that period ot
inflation, and the large number of failures during the period of deflation due
partially, we will say at least, to those reasons as well as possibly to the
system of examination?—A. I think you might put that even a little more
plainly. I am very glad you asked that question. It is a fundamental ques-
tion. I will say at the beginning that it is my confident belief that if the
policies which were in vogue at the time when President Wilson was President.
and Secretary McAdoo was Secretary of the Treasury had continued, and if
Mr. McAdoo had remained at the head of the Treasury, there would not have
been in the United States that period of drastic and artificial and unnecessary
deflation which came about. As a matter of fact, I prepared after a good dea!
of care a chart showing the tragedy of artificial deflation, and I have shown
how the tumble in prices and the drastic deflation which took place was con-
temporaneous with the change of policy on the part of the Federal Reserve
authorities of the United States in restricting credit in calling in loans; and
that as the withdrawal of credit proceeded and the lack of loans and of
Federal Reserve notes was felt prices came down, pari passw with the curtail-
ment of credit. If Mr. McAdoo had been at the head of the Treasury during
that period from the spring of 1920 up to the spring of 1921, in my judgment
that deflation would have been nothing like as drastic or as cruel or as heartless
as it was. I was a member of the Reserve Board during that period, and I
remonstrated and expostulated against the policies which were in force, against
the restriction of credits which seemed to me to be proceeding in an unreason-
able and extreme manner. I do not have to say now all that I said, but this
was said: I filed my written remonstrance with the Federal Reserve Board in
the summer of 1920. in the autumn of 1920 and in the winter of 1920. and all
through those months when prices were tumbling and the commercial and
financial world was shaking, urging that there should be a relaxation of the
policies which were in force.
By Mr. W. F. Maclean:
Q. Who enforced those policies?—A. Instead of the former Government
or Federal Reserve policy, a policy of contraction was being carried on
unreasonably. When I remonstrated with the Chairman of the Board his
answer was that it was a case of a balloon being inflated by hot air; it was
[Mr. J. Skelton Williams.]
BANKING AND COMMERCE 163
APPENDIX No. 1
up in the air, and he said it was a case of puncturing the balloon. “That is
what is being done,” he said, “ we are puncturing the balloon.” My reply was
that when a balloon was in the air and carrying passengers, the way to bring
it down was by an intelligent use of valves and ballast and not by
puncturing it.
Some hon. Mempers: Hear, hear.
Witness: In my judgment that was exactly what was being done; it was
being punctured instead of being brought down in the proper manner. If
Mr. McAdoo had been at the helm when I filed my remonstrance, a different
policy would have been adopted in my judgment. I believe that if Mr.
McAdoo had been there at that time he would have saved our country many
billions of dollars and thousands of human lives, the lives of men who were
destroyed and ruined and who took their own lives and committed suicide
because they saw everything swept from them in those days by what I describe
as ruthless and heartless deflation.
Q. I think you referred to 1923 as the date?—A. It should be 1920. The
views which I have expressed publicly and privately with regard to the drastic
deflation policies which were exercised by the Federal Reserve authorities in the
United States, are I believe, corroborated and concurred in to a large extent by
men whose opinion on financial subjects you all respect, men like Reginald
McKenna, formerly Chancellor of the Exchequer; Professor Irving Fisher of
New Haven and plenty of other men of that type whom I have quoted in my
published statements in that respect.
Q. You will admit, however, Mr. Williams, that there are two schools of
thought on that subject—A. I do not think there are two schools of thought on
the question of puncturing a balloon.
Q. I agree with you there. I scarcely think, however, that it would be fair
to assume that that was the considered opinion of the Chairman of the Board.
I do not know the gentleman, but I fancy he was using a figure of speech which
was perhaps unfortunate and with which nobody would agree.—A. I will give
you an illustration. During the time I was trying to have deflation brought
about in an orderly way, I read in a New York newspaper which I picked up on
one occasion that two bills were under consideration by certain permanent
officials having to do with the administration of our finances, one of which was
whether it would not be better to put on still more pressure, to create casualties
and kill the wounded so that the limbs and bodies would not litter the way for
others. That was one proposition which apparently was fully advanced by
some financier at that time. I think I brought that out in my testimony before
the Agricultural Committee at Washington. It was a suggestion which I cannot
see how any sane man could make.
Q. A very strong and clear opinion, and no one can understand that at all.
But to come back to what I said a moment ago in regard to those failures, I
think one might say that the scarcity of failures during the previous period of
years was more or less due to the question of deflation and the condition of
inflation. Let me add this one thought, and you will see what my question
really is. No matter what system, no matter what perfect system of examina-
tion one may have, it does not necessarily follow that there will be no failures?
—A. I think I may reply to that by making this statement: If you have a thor-
ough audit system of examination no matter what possible influences may be at
work, deflation or anything else, failures will be very much less with a good
system of examination than without it.
Q, But even with that good system of examination we would still have a
record of failures?7—A. Even with the best system of examination, if a policy
[Mr. J. Skelton Williams.]
164 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
of deflation is enforced as it is possible to enforce it, banks and business houses
and individuals can be ruined notwithstanding any examination that is possible.
Q. Well, take our own system in Canada, free from the arbitrary interfer-
ence, we will say, of such a body as a Federal Reserve Board, the bank would
not be inclined to deflate to their own ruin? The point which you now make
would scarcely apply to the Canadian system?—A. Here is what happened when
pressure was put on by certain authorities in the United States who, instead
of extending credit, credit was drawn in, and some banks to save themselves had
to call upon their customers, and there were many cases where banks did save
their own skins, but their customers were ruined, and if there has been an
intelligent handling of the credit situation or proper handling of the credit situ-
ation, both the banks and their customers could have been saved.
Q. Now, in your description of the system of examination you mentioned
that very often you found it necessary to resuscitate banks, and that some banks
would get into difficulties, and you succeeded in bringing them back into a
healthy condition. Now, that condition was not known to the public?—A. As
a rule, not. cs
Q. Would you advise—A. Right there, I do not want you to draw from that
answer that we permitted a bank to continue in an insolvent condition. What
we would do, if the bank was in a dangerous condition, would be to call upon
the officers and directors quietly, without anybody knowing anything about it,
to put up enough money to save the bank during the period it was to continue.
Q. I think I recall you using a figure of speech, that sometimes a bank was
like a person drowning, even sinking three times, and being brought to the
surface and resuscitated. The question I want to base upon that is, would you
advise making public the facts contained in the reports of the examiners to the
Comptroller of the Currency, the copy of which we have on file?—A. In volume
II of the Comptroller’s report there is published a statement showing the condi-
tion of every National Bank in the United States, as of the Autumn call, the
September call. That, of course, does not go into its affairs in the same detail
as the examiner does in his report. Of course, it would be in many cases fatal
for the report submitted to the Comptroller of the Currency by the Examiner
to be made public, because the depositors would say, “The bank is in a dangerous
condition, perhaps it may be saved, but we do not know whether it will be
saved or not, and we will not take any chances, but will draw out our money,”
and there would be a run of the bank. The Comptroller examines the conditions
to see exactly what can be done. If it is possible, or we believe it is possible to
save the bank, and if the shareholders or directors can and will put up enough
to maintain its solvency, and if so, that is done at once, and nothing is said about
it, the bank goes on in a clean and safe condition.
Q. Have you examined the monthly reports which the Canadian banks
make?—A. I have not.
Q. Then we are clear that it would be inadvisable to make public the facts
in the report given by the examiner to the Comptroller?—A. Certainly.
Q. And such a report should be kept in a confidental state, and the authori-
ties to whom made, in your case, the Comptroller of the Currency—A. Yes, the
report, of course, is filed in the proper office; if it is a govermental agency, it is
filed in that office where it can be analyzed, and the necessary action taken to
save the situation.
Q. And in the case of Canada adopting an inspection of your audit system
including, in a sense, the examination, of Canadian banks, such reports NY
Should never be published in their entirety.
Q. Publication of them would seriously interfere with the efficiency of such
an examination?—A. It might interfere with the redemption and saving of the
banks. We will suppose a case where the report is submitted by the examiner,
(Mr. J. Skelton Williams.]
of Og
BANKING AND COMMERCE 165
APPENDIX No. 1
every word of which is true. It presents a dangerous condition of affairs. The
Comptroller examines it, and they agree if things go along in that manner the
bank will fail and they say, “We can save this, and save it now.” They say,
“We believe the shareholders and directors can be called to put to the bank’s
credit a certain amount, and if that amount is paid the bank will be paid in full.”
we say nothing about that and the bank is safe.
By the Chairman:
Q. Would that assessment not be widely known, and affect the credit of
the institution—A. That is never published. That is always a private matter.
It is to the interest of the stockholders that nothing be said about it.
Q. Can you assess all the stockholders of an institution without the public
knowing it?—A. Of course, there is that danger, but it is to the advantage of the
stockholders not to say anything about it. They might get together and agree
to put it up privately. That is often done without publicity.
By Hon. Mr. Stevens:
Q. In your experience, dealing with these banks heading for insolvency,
using that term, where, as Comptroller of the Currency, you thought it was
time to bring the officials to Washington and discuss the matter; what period
of time might elapse before the banks might be restored?—A. It might be a
week or a month or six weeks. It depends entirely upon the character and
the management and the condition in which the bank finds itself.
Q. Some might run for six or eight or ten months?—A. Mr. Pole, you have
had in your district banks that have been nursed along for six or eight months
before they could be paid out in full, have you not?
Mr. Pour: Yes, and those which had to be nursed for a year, Mr. Williams.
The Wrrness: That critical condition does not continue.
By Hon. Mr. Stevens:
Q. It is minimized?—A. Yes.
Q. In your experience you find it is advisable to nurse institutions of this
kind back to complete solvency rather than when you find them in a critical
position to force them into insolvency?—A. Unless the situation is a hopeless
one.
Q. Then, in most cases, the bank is in some measure with the capital
impaired, and it would be advisable to nurse it rather than to close it up?—
A. I will tell you of some cases we have had where we have nursed them
back to solvency and strength. We found there were a number of cases
where National Banks in the fervor of patriotism, during the war, loaded them-
selves up with Liberty Bonds. They bought more than prudence would com-
mend. As you all know, Liberty Bonds went down to eighty or eighty-five
cents on the dollar. I had a number of cases of that sort to deal with, and
theze were some cases where it was a very nice question to decide as to whether
these banks were solvent. I took the position that if the bank would be solvent
if our Government met its obligations and paid them in full, we could take a
chance on that, and we would permit that bank to continue to carry these
bonds at the par, or approximately at par, if we knew that within a limited
period they would get back their money, and as a result of that I think we
were 100 per cent successful, were we not, Mr. Pole?
Mr. Pore: Yes.
The Wrrness: And our judgment in the stability of the United States
Government and its credit and in the Liberty Bonds eventually going back
from 80 cents or 83 cents to a dollar, saved the banks, whereas, if we had said,
“You must throw over your Liberty Bonds, and lose $170,000 for every million
‘Mr. J. Skelton Williams.)
166 SELECT STANDING COMMITTEE :
14-15 GEORGE V, A. 1924
dollars invested—and some of them had five or ten million dollars invested—
the bank would have had to wind up.
By Hon. Mr. Stevens:
Q. Are there not some two thousand National Banks?—A. Eight thousand.
Q. And some twenty-three thousand State Banks?—A. Yes.
Q. There has been quite a number of National Banks in recent years turned
from the National Bank status to that of the State status. Could you give an
indication of the reason for that?—A. I think that with respect to the present
administration of the National Banks I would rather not go into that in any
detail. I can say, in a general way, that there is a prevalent notion that a
State Bank in some respects has greater privileges, and perhaps not the same
responsibility, a greater license than National Banks, cr that the bankers may
be permitted to have a little greater leeway with the State Banks than with
the National Banks. At the same time, I call attention to the fact that the
National Banks of the country are comparatively maintaining their prestige,
while there has been a large increase in the failures of National Banks, and
as I suggested that increase in the failures of National Banks, is due largely
to the enforcement of the deflation politics which went into effect. Still,
the proportion of National Banks which have been failures is very much less
than the proportion of State Banks, and therefore, the National Banks are
regarded as offering an element of greater safety than the State Banks, as far
as I can observe. In some states, a State Bank is casually examined; in some
states they are thoroughly examined. I am not reflecting on the bank when I
say that some banks are so excedingly democratic that they resent interference
from the Government of any sort whatever.
Q. I think that in the last report of the Comptroller of the Currency, there
is a discussion of the necessity for National Banks to extend or adopt the
Branch Bank System in order to compete with the growing power and influence
that the State Bank has in competition with them. Can you give us any light
on that?—A. The problem of National Bank branches is a large one and very
complicated. I have made a recommendation in my past reports for a limited
extension of the branch franchise.
Q. I recall that. Now, is not the tendency for the extension of the Branch
Banks System in connection with National Banks of the United States growing
from year to year, and the experience in active business becomes more impel-
lant as far as the need of it is concerned?—A. I do not think that in our country
there is any necessity for the extension of the Branch Banking methods or
System. I think that in some cases banks have found it advantageous to them-
selves and to their customers and stockholders to establish a branch here and
there, but I do not believe that there is a likelihood of our adopting in the
United States the Branch System on the scale on which it is operated in England
and this country.
Q. No, I would not think so at all, but there is an evolutionary tendency
that way?—A. Yes.
Q. One other question: This is a question which I asked Mr. Pole this
morning, and I trust you will not take any offence at my repeating it to you.
Having in mind that you have a system of banking made up of individual banks
largely, which has been the growth of the century, and having in mind that we -
have an entirely different system in Canada composed of fourteen central banks
with four or five thousand branches, do you think that the bank examination
system carried on under the Comptroller of the Currency of the United States
could be adopted to the Canadian system?—A. I think I answered that at the
beginning of my testimony.
[Mr. J. Skelton Williams. }
BANKING AND COMMERCE 167
APPENDIX No. 1
Q. You did, in a general way, I recall, but would you mind answering that
again? I do not want to press it if you do not wish to answer it—A. I have
no objection to expressing my opinion. I do believe that it would be entirely
possible for the Canadian Government, if it saw fit to do so, to inaugurate a
system of banking examination more or less analogous to the system which we
have in the United States, which would be effective and efficient, notwithstand-
ing the fact that your system differs so largely from ours, that you have four-
teen or fifteen banks with some thirty-five hundred branches. As I stated
before, it might be necessary in order to make that system of examination
effective, for you to have some modification of your National Bank Act pre-
scribing the methods of bookkeeping and the custody of securities, etc., for each
branch which would enable your examiners to make a real and impartial and
complete examination of these branches without making them contemporaneous
with all the others.
Q. In other words, you would say that by extension of the present system
of audit in Canada, so as to incorporate the other examination, it could be done?
—A. If you want me to speak very plainly, if I were doing it, if I had the super-
vision of the banks of Canada, I should have my own Examining Board. I
should not let the National Banks select their own examiners from year to year
from a comparatively limited list.
Q. The point you make, of course, is a quite a sound one from your point
of view. I cannot and am not going to enter into any argument, but I think if
one could, in a few words, give the full effect of our present system of audit,
you would see that a great deal of the work now covered by the State Examiners,
or the examiners on the other side of the line, is already covered. That is the
point I tried to make a moment ago.
Mr. Mac iran: It is not covered; that is the trouble.
By Hon. Mr. Stevens:
Q. The point you have made, Mr. Williams, is that a State Examination,
such as you have south of the line, could be applied to our system? That is
really the impression I think the Committee has gathered from your answer.
Whether that is exactly what you mean or not, I am not quite sure myself.
There is this, however, in order that I may reduce my question to as narrow a
confine as possible, if this very thorough audit system—and it ought to be borne
in mind there are two independent auditors, neither one dependent upon the
bank for his position—we have the inspection system; we have the reports,
and it is generally agreed there might be an extension of that, and partially an
adaptation of the exterior examination, but what this Committez is divided upon
is that some seem to desire the full adaptation of the American system of
examination, while others of us have a different opinion on that. We feel an
extension of our system would be adequate. Would you care to add anything,
in view of that observation?—A. Yes, I would be very glad to make this state-
ment; that the system of National Bank examination in the United States has
been so efficient and so satisfactory that the Clearing House Associations of a
number of cities which had formerly maintained separate bureaus for the
examination of their local banks decided to give up their local bureaus for the
examination of the local banks, and accept the report of the National Bank
examiners, instead of their own.
Q. I think that was under your administration. I have heard very, very
widely that your administration was exceptionally able and complete. Let me
ask this, however; the whole examination system and the administration of the
Comptroller of the Currency’s Department is subject to the personality, ability,
and integrity of the individual who occupies that office. Is that not so?—A.
That is true as to any office.
[Mr. J. Skelton Williams.]
168 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And that individual, in the case of the United States Comptroller of the
Currency, may be changed at will by the Government in power?—A. Fortu-
nately, as a rule, we have had able men in charge of that important bureau.
Q. I am not reflecting upon the individual at all, but that is the fact, in
regard to that system, is it not?—A. That is not only the fact in the National
Bank System; it applies to all government, from the President down.
Q. And to the change made in 1921, and the policy adopted, and the
administration of that office you, partly, at least, ascribe the failures of the
National Banks—the increased failures?—A. I hope you have not drawn from
anything I have said any suggestion that in my judgment the large number of
bank failures was due to any inefficiency on the part of the bank examiners.
Q. Change of policy?—A. Oh, I do not think that the failures were
primarily and mainly due to the effect of deflation.
Q. And the change of policv—I think you used that term, yourself?—A.
It was a policy of deflation which prevailed after Mr. McAdoo left the Treasury.
Q. Which is incident to the system? The change in personnel and the
change of policy is incident to the system?—A. The change of policy is incident
to any banking system; any banking system may thrive under one policy and
languish under another. I should say in regard to the individual audit of banks
—otf course you know that many National Banks have not only periodical
examinations, but have their own auditors in our country, as well as here, and
those auditors make periodical examinations and are supposed to keep them
up, and keep them in condition, to bring to the attention of the Board matters
requiring connection, but unfortunately the audits which are made by the banks
themselves of that condition has been wholly inadequate.
By Mr. Ladner:
Q. Mr. Williams, I want to ask some questions regarding double liability.
You expressed some views that you would favour that. For what reason, do
you think double liability should be applied to shareholders which in modern
times is done so frequently?—A. The record of the Comptroller of the Cur-
rency’s office. There has been many a bank saved from ruin by this double
ability.
Q. From the point of view of the management of a bank in saving the insti-
tution, but from the point of view of the shareholder, and outside persons invest-
ing their capital. How about them?—A. I see your question, as you have asked
it. My point of view is that it is better from the standpoint of the shareholder
and also from the point of view of the depositors, and I will explain why, from
the point of view of the stockholder. In the first place, the stockholder of a
bank, when he realizes if the bank is mismanaged, he may be called upon to
pay one hundred cents on the dollar on his investment, in addition to going
without the dividend, is more apt to look carefully after the personnel of the
management, and see that. efficient and capable men are kept in charge of the
bank. From the standpoint of the depositors, the depositors feel they have
doubled the security, assuming the stock is subscribed to by men who have real
money to invest, and not by men who borrow it, and, therefore, they are willing
to make their deposits in the banks with smaller capital, than they might other-
Wise require.
@. Why should not the same principle of additional liability be applied
to other concerns—to Trust Companies?—A. It does apply in some cases to
Trust Companies, as well as banks. I agree with you, it is a safer method both
for trust companies, and other kinds of depositories. —
. “ Then you would limit the double liability to where there were deposits?
—A. Yes.
(Mr. J. Skelton Williams.]
BANKING AND COMMERCE 169
APPENDIX No. 1
Q. Well, take railroad corporations—A. The railways are not entrusted
with the custody of the funds of depositors of a banking community, or the
mercantile world.
Q. Then it is chiefly for institutions accepting deposits?—A. They are
entitled to additional security.
Q. To the additional security of double liability?—A. Yes. When a bank
accepts the funds of the public in deposit, and uses them in their own business—
Q. Do you find by actual experience in cases of failures that the double
liability is collected in the United States?—A. You could always count upon a
portion of it being paid. In some cases we were unable to collect one hundred
per cent; in other cases, the collections were very satisfactory.
Q. Have you any idea of the average?—-A. However that may be, our
experience has been that the payment on account of these double liabilities
have been a great protection to depositors.
Q. And do you find that this double liability is a deterrent to investments
in banking institutions?—A. It did not seem so, when I was Comptroller, the
rates that the banks were being chartered. I think the country was well sup-
plied during those seven years with National Banks, notwithstanding the fact
that there was double liability.
By Mr. Cahill:
Q. Was the stock held widely or confined largely to the district of the bank’s
operations?—-A. Of course, the stock of National Banks is largely held in the
communities in which the bank is located.
By Mr. Ladner:
Q. Now, I would like to ask some questions regarding the question of pro-
tection to savings deposits. A proposal has been submitted to this Committee
whereby, in addition to the present class of accounts, current accounts and
savings accounts, a further class of accounts will be established in all chartered
banks where the depositors would receive, say, less than the established rate
of 3 per cent, 2-7 or 2-8 per cent, or whatever it may be. The idea being that
such accounts in that special class up to $3,000 would be protected by the
establishment of an insurance fund contributed partly by the depositors and
partly by the bank, much in the same way as we now have established bank
circulation redemption funds ‘in connection with bank notes. I would like to
ask, if, in your opinion, a scheme of insurance of that kind would be advan-
tageous to stabilize the confidence of the people in the smaller banks and to the
protection of depositors?—A. I recommended in one of my reports several
years ago the guaranteeing of deposits of $5,000 and less, and presented my
arguments.
Q. That is in one of your reports?—A. Yes.
Q. And you figured that the rate of insurance would be $25 a million—A.
I was just looking for those figures. It was an inconceivably small amount.
In other words, it was based upon the experience of previous years.
Q. Now, there are existing a number of systems by which there is a total
guarantee of all deposits. I wish to draw the distinction between that scheme
and the one where the deposits are limited to $3,000 and under, that is, this
special class of accounts which the depositor would select, because it would
grant him protection?—A. I think it would be very unwise to guarantee all
deposits of banks.
Q. What do you think would be wise?—A. $5,000.
Q. $5,000 and under?—A. Yes.
Q. Would you just develop that a little?
[Mr. J. Skelton Williams.]
170 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Cuamman: Would you quote a portion of your report which contains
that?
The Witness: Yes: “ Full guarantee of bank deposits for $25 per million
of deposits.”
FULL GUARANTEE OF BANK DEPOSITS FOR $25 PER MILLION
OF DEPOSITS
During the past six years of stress and strain the losses to national
bank depositors from failure have been reduced to such unprecedentedly
low figures that an annual charge on all deposits of 24 ten-thousandths
of 1 per cent of deposits would have been more than sufficient to cover
all such losses accruing to the depositors of our national banks for this
period. It is believed that it would be preferable at the outset, as here-
tofore recommended, to begin with a guarantee of deposit balances of
$5,000 or less, and the guarantee plan can then be developed in accord-
ance with the lessons of actual experience.
If the excellent record made by the national banks in the past six
years in the matter of immunity from failure should be maintained the
Government could meet all such losses arising from the guarantee of
national bank deposits from 1 per cent of the annual profits which it
will receive as a franchise tax from the operation of the Federal reserve
banks, if we assume that these reserve banks in the future should only
make one-half of the net earnings which they have made in the past
twelve months.
No better way can be suggested for bringing into life and getting
back into circulation the enormous amount of money which is now
hidden and stored away and kept out of banks by timid and nervous
owners. The guarantee of all deposits in national banks of $5,000 and
less would give complete security for their money to more than 19,000,000
depositors whose deposits in the national banks at this time are estimated
at about six thousand million dollars. The remaining individual deposits
in National Banks, about eight billion dollars, stand to the credit of
depositors whose balances exceed $5,000, and those larger depositors
aggregate in number, according to the latest estimates, considerably less
than 5 per cent of the total number of depositors.
My strong reason for that guarantee and for that limitation would
be that it would take care of people whom it is most important to safe-
guard, the poor people who have their savings in banks; in many cases all
they have in the world is in the bank; and when they put their money
in and know that it is safe, it gives them a sense of security which they
could not otherwise have.
Q. You think that a scheme like that is practicable in the United States
and Canada?—A. I am not undertaking to advise you, but I see no reason why
it should not be applied to Canada. I am convinced that it could be advantage-
ously applied to the United States, but Congress did not agree with me.
Q. Is it not really a question of working out a rate of insurance, actuarially,
on past experience?—A. You can work it out on past experience; you cannot
say as to the future. My judgment is that it is a risk which could be properly
taken with an efficient system of bank examination. I would not think of recom-
mending anything of that sort unless it went along with a complete and com-
prehensive and thorough system of bank examination.
Q. To express the point of view of the depositor is of course very important.
Now, from the point of view of the bank, I would draw your attention to what
[Mr. J. Skelton Williams.]
BANKING AND COMMERCE 171
APPENDIX No. 1
actually exists in Canada. In 1923, at 31st December, of the total deposits
within about one half of one per cent calculations, 70 per cent of those deposits
were in our four largest banks, and 30 per cent were in the remaining 10 banks;
end owing to the failure of the Home Bank, I think, and perhaps other causes,
it is said that there has been a great deal of shifting of deposits from the smaller
institutions to the larger ones, so that the smaller institutions carrying overhead
are faced with less deposits. Now, would such a proposal in your judgment
stabilize the confidence of those people in the smaller institutions and enable
them to remain in competition with the larger ones.—A. I think that can hardly
be a matter of opinion; it is a matter of fact.
Q. Do you think that the fact that we have a branch banking system, a
system of 14 banks with branches, instead of a unit system, would make any
difference to the practicability of such a proposal?—A. What argument is there
against it?
Q. i do not think there is any. I am favourable to the scheme, you under-
stand.—A. I see no objection to it.
Q. In your proposal Mr. Williams, do you propose that the depositors pay
any portion of the premium for this insurance scheme?—A. No.
Q. You think that the bank should pay it all?--A. I suggest that that
premium could be met by taking a small proportion of the surplus earnings of
the Federal Reserve Banks.
Q. Since the establishment of the Federal Reserve Bank, we have learned
that it earned $135,000,000 of profits which went to the Government?—A. The
profits have been very large.
Mr. Poe: $136,000,000.
By Mr. Ladner:
Q. In your opinion, would the establishment of such a system of guarantee
cause all the depositors to take advantage of it to the extent of $5,000?—A. Why
should they not, if it costs them nothing? It would be automatic. That means
that if any depositor puts his money in a Canadian bank it is guaranteed up to
$5,000.
Q. Suppose that instead of receiving the full percentage of rate of interest,
they only received a portion, say 2-8 per cent, and did actually contribute their
proportion to the premium; do you not think that that would have the effect of
causing the large institution and the people who understand the solvency of
banks to allow their accounts to remain in the current accounts and current
savings accounts as they do now and make it les: difficult to apply the system?
—A. I do not exactly catch the point of that question.
Q. If a person could get as high a rate of interest in this new class of savings
accounts as they can under the present conditions they would naturally take
advantage of it?—-A. They would take the protection of the Government.
Q. But if the depositors had +9 pay a little bit for the poor man who wanted
protection, he would not mind taking a little bit less?—A. My point is that I
would take care of the poor man. If I can do it without paying extra I would
do it.
Q. The result would be that you would have everybody, poor and all alike,
people who do understand the solvency of banks and others who do not, all
taking advantage of this account and perhaps embarrassing the operation of
the banks?—A. I do not see how it could embarrass the operation of the banks
if there was a Government guarantee. How would it embarrass the operation
of the banks?
1—24
(Mr. J. Skelton Williams.]
172 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Your proposal is that the Government guarantee it, but my proposal
does not mean that the Government is behind it. To what extent do they
guarantee it?—-A. Full $5,000.
By Mr. W. F. Maclean:
Q. That is in National Banks?—A. National Banks.
By Mr. Ladner:
Q. Does everybody take advantage of it?—A. Yes. ;
Q. You have gone into this scheme and made a study of it—
By Mr. Cahill:
Q. The Government of the United States is making a profit from the opera-
tion of the Reserve Bank which you might use as an insurance fee. That would
be the difference?—A. Of course the Government of the United States makes
a double profit out of the National Banks. They have a certain tax on circula-
tion and in addition the Federal Reserve Banks themselves make a profit in
which the Government participates, so that if you put it on a plainly business
basis, the premium which you might pay might come indirectly out of the
National Banks’ profits which have gone to the Government.
By Mr. Ladner:
Q. In short the scheme aims primarily to safeguard— —A. The small
depositor.
i Q. Who does not know anything about one institution or another?—A. It
oes.
By Hon. Mr. Stevens:
Q. Would not that have a tendency to take deposits from the State Banks
to the National Banks?
Mr. W. F. Macuean: Who cares?
Wirness: Yes, it would have a tendency to make the State Banks nationalize
and stop the exodus from the system at once, I think.
Mr. Lapner: There are those who say that there are two schools of thought—
Mr. Suaw: I would like to suggest that it would be very valuable to the
Committee if ample time were available to Mr. Williams to give us a bird’s eye
view of the Federal Reserve System and the reasons for calling it into being.
Wirness: I would be glad to do that if time permits.
The CHatrMANn: I would suggest that members rush their questions because
we have barely an hour left.
By Mr, Ladner:
Q. There is a question of the Government opening savings offices to receive
deposits of the people on which they pay a rate of interest from 3 to 4 per cent
in competition with the banks?—A. Jn this country?
Q. Yes. Assuming such a thing to exist, do you think that that is in the
interests of the public or our commercial institutions, or do you think that the
banks should receive the deposits under proper supervision and give service to
the industrial and commercial communities?—A. We covered that question in
our country by a postal savings system in which the post office in almost any
place may accept the deposits of the local people.
By Mr. W. F. Maclean:
Q. And marked cheques?—A. No, certificates of deposit, bearing I think 2
percent or 23 per cent. Perhaps Mr. Pole could tell you definitely.
{Mr. J. Skelton Williams.]
BANKING AND COMMERCE 173
APPENDIX No. 1
Mr. Poin: Two and a half per cent at least.
Wirness: When that money is withdrawn from circulation by the industrial
worker and put into the post office, the post office deposits it in a National Bank
so that it may not be capital locked up and keeps it on its way. The National
Bank receiving it gives security, deposits with the Treasury of the United States
security to cover the deposit in that particular bank.
By Mr. W. F. Maclean:
Q. How does he get the money out?—A. It is made very easily convertible,
I think there is some provision that after a certain period he can convert it into
Government bonds bearing 3 per cent or certificates bearing 3 per cent. I do
not know to what extent these regulations may have been changed or modified
in the last year or so. But the main principle is as I have said. Any individual
may deposit money in a post office at 23 per cent, and the postmaster deposits
in some National Bank, which bank limits the rate of interest I think, 2} per
cent to the postmaster and gives security for it.
By Mr. Ladner:
Q. Last year we were interested in and I had oceasion to file a proposal
in connection with a Federal Reserve Bank or Central Bank of rediscount in
Canada. I propose to ask you for your ideas upon this, but before doing so,
perhaps I should draw your attention to the conditions in Canada under our
branch bank system and under our Finance Act. Are you familiar with our
Finance Act?—A. No, I am not.
Q. It provides facilities for rediscount on putting up securities—
The CHairmMan: I would like to draw your attention, Mr. Ladner, to the
fact that two other members have expressed a desire to ask questions.
Mr. Lapner: I am asking him now to make a statement based upon the
conditions as we have them in Canada.
The CHarRMAN: So far as I am concerned, it would be quite agreeable
to me to have that statement, but I think it would be rather unfair to the two
other members who wish to put a few questions. I would suggest that this
matter be left over and included in the statement which Mr. Williams will
make at the suggestion of Mr. Shaw. I would like, if possible, to give an
opportunity to the other hon. members who desire to put questions to do so
now, if it is agreeable to the Committee.
By Mr. McMaster:
Q. Mr. Williams, would you inform the Committe whether the leading
National Banks of the United States are glad to co-operate with your system
of examination, or whether they have accepted this system with a wry face?—
A. Both. When the system was in the making a great many of the larger and
more important banks antagonized it. They were opposed to it; they
derided it, and belittled it in every possible way, and there were those who
doubted the efficacy of the Act, and the possibility of making a success of it.
However, when the Federal Reserve Act was passed by Congress, and the
machinery was set in motion, and when the banks began to function, I should
say that 95 per cent of its enemies were won over to the system. I think if
there should be a poll to-day of the National Banks of the United States, that
not less than 95 per cent of them would be in favour of the system.
By Mr. Maclean:
Q. Is it imperative? Do they have to submit to it?—A. When the system
was put into effect, the suggestion was made that some of the National Banks
(Mr. J. Skelton Williams.]
1—243
174 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
would never accept it; they would go out of the system, and it was made
compulsory if the National Banks were to continue as National Banks, they
must join the system. They can refuse to join if they wish. Some said there
would be a general exodus from the system, banks which would withdraw
from the National Bank System and accept State Bank charters. When the
system went into effect there were few, if any withdrawals. They all accepted
it, and I think the vast majority of the National Banks of the country regard
it as a wonderful measure, and one which they would not do without, if they
‘could help it.
By Mr. McMaster:
Q. As I recollect, there was very great opposition at the beginning, and
the Government really had to imposes it on the banks?—A. The Government
made it a condition of maintaining their charter that they should join the
system, and very few, if any, gave up the charter, and I think they are glad
they did not.
Q. Am I right in gathering from your remarks that the Comptroller of the
Currency, when a bank is in a precarious condition, has a right prior to its
insolvency to call upon the shareholders to make good any deficiencies in the
capital of the bank—A. You mean before the failure of the bank?
Q. Yes?—A. Yes, I do not want to be misconstrued or misunderstood in
regard to my criticism of the policy of the Federal Reserve System. I think
the Federal Reserve System is the greatest banking and currency system in
vogue in any country to-day, but I have criticized its administration in certain
respects. I think the Leviathan is a wonderful ship, but we can see it might
lead to disaster if the Leviathan should be placed in charge of a captain and
a crew who were not sufficiently posted and sufficiently capable of directing
it in a tempest. It is a question of the administration of the Federal Reserve
System, and not of the System itself. I think, as I have indicated to you, that
if the Federal Reserve System had had the benefit of advice and guidance at
a very critical time in the history of our country, of Mr. McAdoo and as I
have said, President Wilson, Secretary Glass, and Senator Owens, who were
largely responsible for the creation of that system—if they could have
remained there, and Mr. McAdoo had remained as Chairman of the Board,
he would have foreseen the dangers of pursuing too far the policy of restricted
credit, and the economic and financial history of our country and of the world
in the past three or four years would have been very different. Now, of course,
it is important for any great piece of machinery or any great law to be admin-
istered properly, that it be done as efficiently as possible. We are all human,
and errors will occur in the management of any body of men, or any piece
of machinery. The main thing is to make it as “ bomb-proof” as possible.
I wanted to make that statement as my opinion of the Federal Reserve Act.
I would say right here that, as Comptroller of the Currency, it was my duty
under the Federal Reserve Act, and as a member of the Organization Commit-
tee, in conjunction with the Secretary of the Treasury and the Secretary of
Agriculture, to divide the United States up into the twelve Federal Districts.
That was a duty which was imposed upon those three officials. Those three
public officials established the Federal Reserve districts, and the twelve
Federal Reserve cities, and the charter of each one of the Federal Reserve
Banks was signed by me as the Comptroller of the Currency, so I have every
reason to feel kindly towards and believe in the Act, and to resent any possible
mismanagement of the System, or errors that may creep up, as they will do,
in any proposition. If you would like me to do so I shall be glad to read from
my annual report of 1914, as Comptroller of the Currency.
[Mr. J. Skelton Williams.]
9
BANKING AND COMMERCE 175
APPENDIX No. 1
The Cuairman: You might allow Mr. Good to put a few questions first.
Mr. Goon: I think in view of the rapid passage of the time, I shall take
my chance of asking Mr. Williams a few questions after he has made his state-
ment regarding the Federal Reserve System. May I, before he begins, how-
ever, point out what I would like to have him give us in that connection, not a
detailed statement of the constitution and operation of the system, but a bird’s-
eye view of the situation that the United States faced financially prior to the
establishment of the system; the weaknesses that existed then; an outline of
the main features of the system; something as to the remedies effected by the
system after it once was put into operation, especially with reference to the
safety of depositors. Mr. Williams has put before this Committee the relevancy
of this question of the establishment of a Central Bank to the question of the
safety of depositors. I would like him also to deal with the question of the
establishment of a Federal Reserve or a Central Bank re-discounting and
reserve in relation to the safety of depositors. I should like Mr. Williams to
deal with the possibilities that lie in a bank to stabilize the price level and
prevent these terrible disasters to which he has referred. I think he has stated
to Mr. Stevens that the disasters which have overtaken the United States banks
in the last few years have been due—
The Witness: To a large extent.
Mr. Goop: —to the ruthless, and too rapid deflationary policies that were
begun in 1920. Mr. Chairman, if Mr. Williams would give us from his point
of view a bird’s-eye view of the Federal Reserve System, and possibly in con-
clusion—if he has considered the matter—his views as to the adaptation of the
principle, under the United States System of a Central Bank of Canadian con-
ditions, I shall be glad to have his opinion on that.
The Witness: I think in my annual report as Comptroller of Currency
for 1914 (EXHIBIT No.9) I gave what might be regarded as a bird’s-eye view
of the situation, and I shall be glad while reading it to be interrupted at any
point if anyone wishes to ask a question on any of the points covered.
’ The Federal Reserve Act, approved by President Wilson on Decem-
ber 23, 1913, is designed not only to cure weaknesses and defects of the
currency system under which we have struggled, and sometimes stag-
gered, in the past, as we have outgrown the conditions and passed beyond
the circumstances which it was especially provided to meet, but to offer
to the people of this country many new advantages and opportunities,
while emancipating business from many evils, difficulties, and troubles
with which it has been burdened and from which it has found no escape.
Among the principal direct benefits which the new Act confers are
these :—
First, it supplies a circulating medium absolutely safe, which will
command its face value in all parts of the country, and which is suffi-
ciently elastic to meet readily the periodical demands for additional cur-
rency, incident to the movement of the crops, also responding promptly
to increased industrial or commercial activity, while retiring from use
automatically when the legitimate demands for it have ceased. Under
the operation of this law such financial and commercial crises, or
“ panics,” as this country experienced in 1873, in 1893, and again in 1907,
with their attendant misfortunes and prostrations, seem to be mathe-
matically impossible.
Second, it provides effectually and scientifically for the mobiliza-
tion of bank reserves in the twelve Federal reserve districts, where these
funds are not only available for the member banks of each respective
district, but, under wise and well-guarded provisions of the law, the
rae (Mr. J. Skelton Williams.}
176
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
surplus moneys of any one district become available for the legitimate
needs of any other districts which may require them.
Third, it eliminates the indirect tax of many millions of dollars
annually upon the commerce and industry of the country, heretofore
imposed in the shape of collection or “ exchange ” charges on checks, and
inaugurates a system of clearances by which it is expected that every
check or draft on any member bank in any one of the twelve Federal
reserve districts can be collected ultimately free of the exchange charges
heretofore exacted and may be charged on the books of the Federal
reserve bank to the account of the bank upon which drawn, in most cases,
within twenty-four hours or less after it is deposited with a member
bank. This provision renders available many hundreds of millions of
dollars heretofore carried in transit in the mails in expensive and tedious
processes of collection, sometimes absolutely useless during weeks when
much needed, held in transit moving from point to point.
Fourth, it furnishes a discount system by which every well-managed
member bank may have the opportunity of converting into money by
rediscounting, to such extent as may be necessary or desirable, all com-
mercial paper having not more than three months to run which it may
have taken in the ordinary course of its business. The new law removes,
so far as borrowing money from a Federal reserve bank is concerned, the
limitation which prevented a national bank from borrowing an amount
in excess of 100 per cent of its capital. The significance of this release
may be appreciated when it is realized that some national banks have
deposits amounting to ten times their capital or more. The ability to
borrow only an amount equal to capital would be wholly insufficient, in
many cases, to enable banks to meet the demands which arise from
unexpected runs, or in financial crisis, or other extraordinary demands.
It removes from prosperous and well-managed banks penalties
hitherto imposed on their very prosperity and success.
It relieves the well-managed bank from the limitations of original
capital invested and gives it the legitimate advantages of its own enter-
prise and the business it has built up and actually does.
Fifth, by making it possible for any weii-managed bank to convert
its assets readily into cash to meet unexpected contingencies or runs,
the necessity for the larger reserves heretofore required ceases. It is
estimated that by this reduction in the reserve requirements alone more
than four hundred millions of dollars of money or credits heretofore
held in reserves and inert, will become available for commercial purposes
and the legitimate demands of business.
Sixth, the new law also makes it possible for national banks to lend
money on improved, unencumbered farm property, thus enabling farmers,
the most numerous and in many respects most important portion of our
population to participate directly in the beneficent provisions of the
new law.
Seventh, the new law provides that national banks may establish
branches in foreign countries, these branches to be under the jurisdiction
and subject to the rules, regulations, and examinations of the comptroller’s
office. These branch banks should be material aids in building up our
foreign commerce.
Eighth, the former system of paying national bank examiners by
fee is abolished; and the examinations of all member banks, both National
and State, are now placed upon a basis which necessarily will insure a
thoroughness and efficiency hitherto impossible.
(Mr. J. Skelton Williams.]
BANKING AND COMMERCE 177
APPENDIX No. 1
Under the provisions of the new law the failure of efficiently and
honestly managed banks is practically impossible and a closer watch can
be kept on member banks. Opportunities for a more thorough and
complete examination are furnished for each particular bank. These
facts should reduce the dangers from dishonest and incompetent manage-
ment to a minimum. It is hoped that national bank failures can here-
after be virtually eliminated.
Ninth, the establishment of a system of bank acceptances and an
open market for commercial paper, which, it is believed, will aid and
facilitate this country in obtaining a larger share of international trade
and of the world’s commerce.”
Those are the 9 points and advantages which are obtained from the institu-
tion of the Federal Reserve System as they impress me at the time.
By Mr. McMaster:
Q. Sir, would you just tell us how you established these banks? Just
realize that some of us at least know practically nothing about the matter, and
disclose to us the system and how it operates, especially to secure depositors?—
A. You mean the Federal Reserve System?
Q. The whole thing?—A. Would you like me to discuss the National Bank-
ing System as it existed prior to the Federal Reserve System? Prior to the
Federal Reserve law being passed, our national banking system was based upon
a war measure passed about 1864 under which a class of banks was provided for
which could issue currency on the security of Government bonds. The -only
basis upon which they could issue security was Government bonds. A tax was
imposed at the same time on such banks which prevented State banks from
issuing any currency, practically. I think it was a tax of 10 per cent or 15
per cent, was it not, Mr. Pole?
Mr. Pore: 10 per cent, I think.
The Witness: It was a prohibitive tax on currency, so the only banks
which issued currency after the inauguration of the national banking system
were the national banks. At the close of the war there were about three million
dollars of bonds outstanding, and it was the basis for the currency which the
national banks desired to issue at that time. Since the war the public debt had
been almost paid off, reduced to about one billion dollars, about the year 1912
or 1918, so the opportunity for issuing currency on Government bonds was
passing away, and there was no elastic currency, no way of supplementing the
country’s supply of money so as to keep pace with the growth of the country
and the increase in business, in commercial and industrial enterprises. As a
matter of fact, a national bank with a million dollars of capital, and entitled to
issue a million dollars of notes would really not increase the money in cir-
culation by issuing those notes. They would have to take one million dollars
of their funds and buy one million dollars of Government bonds; when they
bought a million dollars of Government bonds, they would only have a million
dollars of national bank notes which they would have to put out in some way
or other and besides that they would have to put up a 5 per cent redemption
fund. So asa matter of fact the actual money in circulation was reduced instead
of being increased. That 5 per cent redemption fund was kept there and as
national bank notes were sent in from one bank to another to be paid off they
were paid by the Treasurer of the United States, and he would charge them up;
he would pay them from the national redemption fund and notify the bank that
the fund had been charged so much and ask them to make it good. As you can
see, there was nothing elastic about that system, and with the exhaustion of the
Government bonds the basis on which currency could be issued was constantly
[Mr. J. Skelton Williams.]
178 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
diminished. So, in 1913, when the country was in some respects 2 or 3 times as
large as it was in 1864 there was only one third as many Government bonds out
available as a basis for currency as compared with 50 years before. We had
periodical panics every year. When the time came for moving the crops the
question was asked, ‘“‘ Where is the money coming from?” Under the old system
of reserves, the country banks kept their so-called reserves—perhaps I had
better be a little more explicit there. I think there were some 47 cities, the large
cities of the country, whose national banks were called Reserve Banks, and those
cities were called Reserve Cities. There were 3 of the larger cities, New York,
Chicago, and St. Louis which were known as Central Reserve Cities. A bank
in a town of 10,000 or 15,000, or 30,000 population would keep a proportion of
its reserve money in the reserve cities, one of the 47 cities; the smaller reserve
banks were required to keep a portion of their money in the 3 big cities, New
York, Chicago and St. Louis. What happened was this. When the country
banks needed money and called on their reserves in the reserve city, the reserve
city would call on New York, and New York at the same time might have a
very active demand for funds and might not know where to get the money, and
as you know, in the past 30 or 40 years there have been several money panics
when the banks were all solvent but did not have the currency to meet the
demand. The purpose and one object of the Federal Reserve Act was to get
away from that. A little bank would send a thousand dollars to the big one,
and that was sent to New York and counted 2 or 3 times in the process, creating
a fictitious balance, and it was wholly inadequate to meet the demands. As a
result of that system we had these frequent panics and almost every summer when
crop moving time came along, there was a tightness in the market. As I have
stated, the 12 Federal Reserve cities were designated by this Committee com-
posed of the Treasurer, the Secretary of Agriculture and the Comptroller of
Currency; New York, San. Francisco, and several in the south and others in the
middle west. It was provided that each of the national banks should subscribe
to the capital stock of the reserve bank of its district, should subscribe 6 per
cent of the stock, and that they should pay up 3 per cent. I think that was it,
was it not, Mr. Pole? Six per cent the original subscription?
Mr. Poe: Six per cent, yes.
The Witness: They paid 3 per cent in cash, and are still liable for the
remaining 3 per cent. As the capital of the banks at that time was about one
billion dollars, that provided for an initial capital of about sixty million dollars
for the Federal Reserve banks, and the average capital was about four or five
million dollars. Now, the banks had that initial fund of sixty or seventy mil-
lion dollars to start with; it is now something over one hundred million, and
then they said to the reserve banks, “ You must keep your reserve entirely with
the Federal Reserve Banks; instead of keeping it in the reserve cities or New
York, put it all in your own reserve bank.” In that way there has been built
up a reserve of these banks—perhaps I should say that the provision was that
in the so-called country banks they must keep 7 per cent of their deposits in
reserve, 7 per cent of their demand deposits and 3 per cent of their time deposits.
The reserve cities must keep in their bank 10 per cent of their deposits, and
the central reserve city banks of which there are three, New York, Chicago and
St. Louis, must keep in the reserve bank 12 per cent of their deposits in cash.
These reserves had to be paid in in gold, or the equivalent of gold. Naturally,
the twelve Federal Reserve Banks have been able to accumulate in addition
to their capital of sixty-two million, a reserve balance of a thousand million,
or twelve hundred million, all gold, and it is upon this basis that they have been
extending accommodation to the member banks, of the country. It at one time
amounted to as much as three million dollars altogether.
{Mr. J. Skelton Williams.]
BANKING AND COMMERCE Vee,
APPENDIX No. 1
By Mr. McMaster:
Q. May I interject a question. Do the reserve banks loan to anybody but
banks?—A. The reserve banks can only loan to the member banks of their own
district, except that there are certain provisions in which they can buy in the
open market bankers’ acceptances or trade acceptances of a long time character.
Their only dealings are with their own banks. The twelve reserve banks can
also loan to other reserve banks which may need the money to accommodate
their customers. There is a provision in the law which makes it possible for
any Federal Reserve bank to be required to loan to another bank if they should
be slow about granting the accommodation which some bank might need. So,
if the bank in New York says, ‘ We will keep all our money here,” the Reserve
Board can say, “ No, loan San Francisco fifty million dollars” and they have
to do it. So the twelve banks are all piped together as it were. If the funds in
one bank are low, they can open the valve and let the money flow in from another,
so it is possible to keep them all at the same ratio if it is desirable to do so.
However, the reserves range from sixty-three million up to seventy or eighty or
ninety million. If it were desirable, for any reason, to require them to keep
the same reserve, that could be done.
By Mr. Cahill:
Q. Is the stock all owned by the member banks?—A. The stock is all
owned by the member banks. There was a provision in the law, I believe, which
authorized the Reserve Board to accept public subscriptions for such portion of
the stock as might not be subscribed by the member banks, but it was never
necessary to take advantage of that.
By Mr. Good:
Q. I hope Mr. Williams will not forget one or two of the points I mentioned,
as to the possibilities of stabilizing the price level; as to the applicability of the
principle of a central bank to Canadian conditions, and further as to the safety
of depositors generally?—-A. As to the safety of depositors generally, I will
take that first. Under the provisions of the Federal Reserve Act any well
managed, honestly managed, prudently administered bank can always convert
its commercial paper, eligible paper into cash, as they never could before.
Q. Failures would be minimized?—A. Unquestionably. Therefore, there
is no reason for a bank which is full of good paper closing its doors, because its
reserve bank can take the paper off its hands. If it is filled up with rotten
paper, and the bank has been dishonestly managed, and has become insolvent——
By Mr. W. F. Maclean:
Q. And has not been properly inspected?—A. Yes; there is no provision
for the reserve bank making good an actual deficit and giving good money for
rotten paper, but if the bank has been prudently managed, if it has observed
the limitation of loans, and has not loaned more than it is authorized to loan,
it is not likely that the assets will be destroyed or wiped out all of a sudden.
Q. So the discounting could be closely Jinked up with the inspection service?
—A. Undoubtedly.
By the Chairman:
Q. Any definition in the Act as to what is discountable paper?—A. Yes,
it is clearly defined. I will leave with you the clearly defined instructions on —
that. They know whether it is eligible or not; there are safeguards there; the
paper issued for agricultural, commercial or business purposes may be dis-
counted, but paper issued for investment and speculative purposes is not subject
to discount.
[Mr. J. Skelton Williams.]
180 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Good:
Q. As to the possibility of stabilizing the price level to a justifiable interest
rate?—A. That is a matter that I think should be given every consideration
and should be gone into very cautiously. I do not think the Federal Reserve
Board ought to tamper with prices too far. I think they should adhere closely
to the functions of banking. I think it was wrong for the Federal Reserve
Board. if they did it deliberately, to undertake to bring prices down by calling
in credits; I think that was an unjustifiable act.
By Mr. McMaster.
Q. That was the effect of calling in the credits?—A. If that was their
purpose, it was not justifiable. The prices at one time were too high, but it
was obvious to any economist or business man that they were not always going
to remain on that basis. Would it not have been much better for the country
to have gone slow and permit the individual and the consumer to use up the
high-cost stuff as they went along and reduce the cost by degrees, so there
would not have been the decline that there was?
By Mr. Good:
Q. The point I raised is this. Mr. Williams has stated very definitely
that in his judgment the mismanagement of the system led to very serious
consequences indeed—A. Instead of ‘“‘mismanagement” I think I would rather
you would use the term “ ill-advised policy ” they followed. The result of it
was mismanagement, but I should. not care to go so far as to say there was any-
thing deliberate about it. I think they followed the policy of drastic deflation
entirely too far.
Q. If the policy was ill-advised or ill-conceived, then I raise the question
as to the possibility of utilizing this system to carry out a policy which is well-
advised and well-conceived, conducive to the general welfare in the matter
of preventing inflation or deflation——A. That is a very large question and must
be considered in its broader aspects, as to how far the banking system must
undertake to interfere with prices. It is a large question.
By Mr. McMaster:
Q. Under the present organization of credit, is not banking bound to inter-
fere with the price level? ——A. I think it would be wrong for the Federal Reserve
System to reduce discount rates to an absurdly low price, because everybody
would run in and borrow money and then up would go the prices again.
By Mr. Good:
Q. Which would lead to inflation?—A. Which would lead to inflation, and
I think it would be equally wrong and perhaps a little worse if they bring
things down to a little less than their real value.
Q. Without pressing this matter further, I should like to have your views
as to the applicability of this principle to Canada. I may say that in Canada
we have had established, I think, a litle over 10 years now, central gold
reserves where the banks may deposit either gold or Dominion notes and get
permission to print their own notes in substitution thereof, and we have also—
Mr. Garuanp: Not in substitution thereof. Is there not some proportion?
By Mr. Good:
Q. No, I think it is dollar for dollar. Then in 1914 we have the War
Finance Act which gives the rediscount privilege to banks. That was a war
measure and it has been on the Statute Books ever since.
Mr. Suaw: I think you should point out that this is under the control of
a Board. ;
(Mr. J. Skelton Williams.]
ang
BANKING AND COMMERCE 181
APPENDIX No. 1
By Mr. Good:
Q. Yes, the central gold reserve is under three trustees, two appointed by
the Canadian banks and one by the Government. ‘The administi:ation of the
War Finance Act is ostensibly under the Minister of Finance but really under
the Treasury Board. Now, there was a proposition which was discussed some-
what this morning and has been discussed at other times for the creation of a
central bureau, or supervisor, or superintendent, some person or committee
under the Department of Finance which should co-ordinate these various activi-
ties that are now carried on separately; that is, the administration of redis-
counting, administration of any kind of Government inspection which might be
adopted henceforth, and the administration of the reserves which, as you know,
furnish a certain amount of elasticity to our currency. I should like to have
your opinion on this; it was asked of Mr. Pole this morning, as to the advis-
ability of co-ordinating these various activities, as well as the establishment in
Canada of something like the central reserve bank in the United States—A. I
think I can answer that in this way, if you will permit me, by saying that I
see nothing in your system of banking, or your Bank Acts, or your conditions in
Canada, which would make it in any way impracticable to have such a system
in Canada as we have in the United States. I cannot say that the way is
entirely open, and that there is no reason why it should not be done, or it
should be done, but I will say that I can see no reason why such a system as
we have in the United States should not be very successful in Canada, and it
is my belief that it is entirely practicable. I think the conditions here are in
many respects similar to those in the United States. You have a wide section
of country where conditions vary, from the Atlantic to the Pacific, and you
could have, say four or five, Federal Reserve Banks between Montreal and
Vancouver which could perform the same functions that our 12 Federal Reserve
Banks perform in our 48 states.
Q. They would have knowledge of local conditions?—A. With a knowledge
of local conditions. I cannot conceive of any reason why it should not be done.
Q. That organization, then, might undertake the rediscounting processes
that are now carried on, inspection, and the reserves?—A. Certainly. You could
have the same basis of currency, if you cared to do so, that we have. One thing
I have not made clear to you is the way we issue currency. Mr. Jones comes
to a member bank and says, “ Here is fifty thousand dollars of commercial
paper issued for business purposes, industrial purposes, and I want you to dis-
count it.” The First National Bank of Montreal says, ‘“‘ All right, we will take
your paper. We are a little hard up but we’ will let you have the money if you
want it.” They take that paper to your reserve bank in Montreal .and say,
“Were is $50,000 from Mr. Jones and $50,000 from Mr. Smith, $100,000 alto-
gether. We want you to discount this for us.” They say, “ Very well, we will,”
and they give you a credit of $100,000.—no, they give you the money. Then
you take that paper and go to the Federal Reserve agent in the bank and say,
“ Here is $100,000 of paper; we want you to give us $100,000 of notes to make
good the money we have just loaned.” The Federal Reserve agent says “ All
right; You have got 40 per cent of gold against these notes?” You say you
have, and he says. “Here is $100,000 of Federal Reserve notes of Canada,”
and he hands you $100,000 of Federal Reserve notes of Canada, backed by 40
per cent of gold, and $100,000 worth of paper, and I think the notes here would
be as good as in the United States.
By Mr. Benoit:
Q. Do you consider your banking system the best in the world?—A. It
meets our situation all right. I do not think we would be willing to exchange it
for any other.
[Mr. J, Skelton Williams.
182 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. W. F. Maclean:
Q. I wish to ask if there is any provision in the American banking law
which would prevent the directors of a bank from loaning the great bulk of their
capital to two or three individuals?—A. Yes, indeed. There are all sorts of
restrictions which prevent anything of the sort. The member bank is limited
in the amount that they can loan to any one individual. They can only get so
much paper; they can only loan so much, based upon say 10 per cent of their
capital to any one individual, whoever it may be. They can only loan so much,
and if they can only have so much of one man’s paper the Federal Reserve
bank can only loan proportionately,
By Mr. McMaster:
Q. Do you consider that a wholesome provision?—A. If one man should go
to two or three banks and try to get paper discounted, the Federal Reserve
banks would have tab on him. The Federal Reserve Banks are kept informed
of the condition of the banks; the examiners file reports with them, and in addi-
tion to the reports of the Comptroller of Currency, they have the power to send
their own inspectors to any bank to see how things are going. I have never
heard of any abuse of that sort.
By Mr. Cahill:
Q. Do you think the American system is a more useful system to the
public than our system?—A. It meets our situation.
Q. You would not like to try our system?—A. I would not.
The Cuatrman: Gentlemen, we have only a few moments before Mr.
Williams must go, therefore I would ask him if he has anything to say which
he has possibly overlooked so far.
The Wirness: With your permission I will take the liberty of sending
you certain documents which may have a bearing on what 1 have had the
pleasure of stating to you to-day, including that chart about which I have
been telling you, and also some circular letters and statements which have
been published from time to time in connection with the deflation period. I
will leave with you a copy of the Comptroller’s report for 1920 (EXHIBIT
No. 8), also a copy of the report from which I read in regard to the Federal
Reserve, the report for 1914 (EXHIBIT No. 9); and I will unload upon you
my report for the last six or seven years (HXHIBITS Nos. 10 and 11). I will
also leave to the members or to your secretary a digest of the report submitted
by the National Banks from time to time (EXHIBIT No. 12). Then, here is
the form of application for rediscount which is filed by a member bank for a
Federal Reserve Bank (EXHIBIT No. 13); a copy of the Federal Reserve Act
itself (EXHIBIT No. 6); and here is ammunition on our file, different kinds
of forms and schedules (EXHIBIT No. 15). Here is the form of examiner’s
report on the conditions (EXHIBIT No. 14). You will notice two or three
yellow leaves there. They represent a confidential report. It was so con-~
fidential that it was handled separately. Then, here is a copy of the digest
made by the statistical department of the Comptroller’s office (EXHIBIT No.
4). This shows how the reports from the 8,000 banks are digested as they come
in. There are other forms which I will leave with you, and which your secretary
nas eare to look over, material which is used in one way or another (EXHIBIT
o. 15).
Mr. Lapner: I think these forms should be all placed in our report.
The Cuarrman: I may say that I have gone through some of these forms
with the Clerk, and I will make a report to the Committee as to the advis-
ability of having them printed.
[Mr. J. Skelton Williams.] i ' phy} i a ; BF ‘| ii a i] He
BANKING AND COMMERCE 183
APPENDIX No. 1
Wirness: In this report for 1919 there are three charts in which I think
I may take some pride and satisfaction, showing the reduction of bank failures,
the amount of profits and so forth.
Now, I think I have done. I want to thank you all for your patience in
hearing me deliver myself on what is rather a dry and technical subject. I am
very glad to have had the opportunity of being with you.
The CuairMan: I am sorry that words fail me to express adequately the
sentiment of the Committee, the sentiment of gratitude to the Hon. Mr. Wil-
liams who has been kind enough to accept our invitation and offer the most
valuable infcrmation which he has given to this Committee. I am sure that
this opportunity of meeting him and of getting into closer contact with him
wil! contribute largely to increase the cordial sentiment of con-fraternity
which already exists and the sentiment of goodwill that exists between
Canada and the United States.
Hon. Mr. Williams: In thanking you, Mr. Chairman and gentlemen, let
me emphasize the goodwill and high feeling which we entertain in the States
towards Canada, and which has been doubly cemented and increased by your
wonderful record in the Great War. I think that the record which Canada
made in sacrifice of treasure and men is incomparable. None of the allies did
more than Canada did. I happened to be in Washington during the whole
period of the War and was in close touch with Canada in many ways, and
I realize more fully than you may imagine the magnificent record which you
made for yourselves. I am very glad to have this opportunity of paying a
tribute even in small way to the welfare of Canada, to the work which you
have in hand in endeavouring to forward the interests of a people who are
connected with us by ties of blood as you are.
The Committee adjourned.
Houskr or Commons,
Com™itTEr Room 429,
Tuespay, May 27th, 1924.
The Select Standing Committee on Banking and Commerce met at 11
o’clock a.m., the Chairman, Mr. Vien, presiding.
The CuatrMAN: The first order of business is ‘“‘ communications.” I have
received a letter from the Organization of Home Bank Depositors of the
Province of Quebec, signed by Mr. Logan as President, and Mr. Mitchell
as Secretary-Treasurer in respect to the depositors of the Home Bank. I will
file this communication with the Clerk. There is another communication from
the Association for the Benefit of the Depositors of the Home Bank, signed
by John Pullen, of the National Executive Association for the Benefit of
the Depositors of the Home Bank. This is addressed from 301 Transportation
Building, Montreal.
I have received from Niagara-on-the-Lake a letter from Mr. Gripton,
along the same lines, requesting the consideration of the Committee in respect
to the interests of the depositors in the Home Bank. I have another communica-
tion from Mr. David Mills, 29 Grafton street, London, Ontario, in respect to a
system of auditing in banks. I will file that with the Clerk.
Mr. Maciean: Are these to be printed in the record?
184 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The CuatrMan: It is unusual to do so. They are kept in the records of
the Committee, but if any hon. Members move that they be printed, the Com-
mittee can take action. These are all to the effect of these numerous petitions
which have been presented to the House. While I am bound to communicate them
to the Committee they add nothing to our information. And I have a com-
munication from Mr. Forke addressed to Mr. Mitchell who sent it back to me,
attached to which is a letter written to Mr. Forke by Messrs. Campbell and
Duke, of Stewart, B.C., in respect to the exchange charged on cheques for
collection between banks.
Mr. Macuzan: I think we ought to print that.
The CuatrMan: I will read it to the Committee. These are laid on the
table of the Committee, and can be referred to at any time. This letter says:
“ Stewart, B.C.
April 23, 1924.
Mr. Forkg,
Ottawa.
Dear Sir—We sent a cheque to Vancouver for $11.60 and the
Standard Bank, Vancouver, charged us 50 cents exchange on it, it looks
like highway robbery. I sent a copy of the letter to the Minister of
Finance, as the Government has control over the banks. Kindly place
this matter before the Banking Committee of the House, as it is about
time something was done with the bank. We think the Government
should look into this matter and the Banking Committee should know
this.
We remain,
Yours truly,
CAMPBELL & DUKE,
per Howard Campbell.”
The Cuatrman: I have another communication from Mr. W. O. Sealey,
61 Hunter Street West, Hamilton, Ontario, in respect to Post Office Savings
Deposits, recommending the abolition of the limit for deposits in Post Office
Savings Banks, and then recommending the issuance of cheques on these
deposits.
Mr. Maciean: I wish you would print that one, Mr. Chairman.
The CHAIRMAN: All these communications are available to hon. Members.
If any hon. Member would like these to be printed—
Mr. Maciean: I would like that to be printed.
The CuarrMan: I would suggest that the hon. Member make a motion in
due form and it will then be for the Committee to decide whether this shall be
printed or not. I also have a communication signed by G. G. Henderson, Mayor
of Fernie, B.C., speaking on behalf of the Fernie and Coal Creek depositors of
the defunct Home Bank, appealing for support.
Mr. Irvine: Do you intend to bring in your recommendation to the House
to-day that the scope of the reference be enlarged?
The CuarrMan: I am not quite sure whether it will be possible for me to
be prepared to move the concurrence to-day. I will surely move it to-morrow,
but will do my best to move it to-day. The next order is,“ report of the sub-
committee.” The sub-committee has not met since our last meeting to recom-
mend the names of witnesses, but in reply to Mr. Maclean I may say I have
BANKING AND COMMERCE 185
APPENDIX No. 1
been requested by the Canadian Bankers’ Association to permit Mr. Neill, who
is the Acting President of the Bankers’ Association, to be heard in respect to
the matter of inspection, and, therefore, I would suggest that either this Com-
mittee or the sub-committee recommend that Mr. Neill be heard. I do not think
it would be necessary to wait until the sub-committee recommend this, and I
would suggest that we fix a date to hear the bankers’ side on the question of
government inspection.
Mr. Irvine: I would suggest, Mr. Chairman, that if the Finance Minister
has agreed that some form of bank inspection is necessary, we could hear the
witness suggested when the amendment covering that question has been drawn
up and is before this Committee for discussion. My point is that I do not think
the Bankers’ Association know very much about bank inspection because they
have not got any, and I do not see how they can instruct us very much in the
matter.
The CHatrMAN: The Canadian Bankers have a large interest at stake, and
they are awake to the effect a government svstem would have on their trade;
therefore, I think it would be advisable for the Committee to listen to what
they have to say in respect to this question.
Mr. Mactean: Mr. Chairman, I would like to ask the Minister of Finance
if he is prepared to recommend to this country a system of government inspec-
tion of banks, and if he is prepared, I would like him to show us the Bill and
let the banks see it at the same time, and we will be able to arrive at a con-
clusion. If we do not settle some of these questions pretty soon we will find
ourselves at the end of the session without any distinct settlement of these
important questions, and they will have to go over again. They have been up
in previous years, and to my mind the way to deal with these questions is by
way of a concrete proposal. It is time we had one before this Committee in
regard to government inspection of banks, especially inspection under the
Department of Finance. If we can get a statement from the Minister to-day
that he has accepted it, or is considering it, and that his law officers are prepar-
ing some amendment, we could then get on with some other proposition.
Hon. Mr. Ross: Mr. Chairman, I did not know that Mr. Neill had been
proposed as a witness until you made the statement. I think the question raised
by Mr. Maclean is a fair one, that it is about time the Government declared its
policy, and I say frankly now that the Government has determined that we
should have a system of bank inspection under the Finance Minister, and we will
submit within a short time for the consideration of the Committee proposals
to organize along that line. Possibly the man we place at the head of it will be
called a “ Bank Inspector” and not a “ Chief Auditor.” The question we are
considering very carefully in these days when every person wants economy is
as to whether we can use the present machinery so as to avoid duplication and
an additional number of auditors going about. If we can use the shareholders’
auditors we want to do so. You will understand that these auditors must be of
a select class, and men of standing, and these are changed from period to period,
and the question we are considering is whether this Inspector should in the
first place compel these auditors to send to him, as they now do to the directors,
the sworn statement that they will check over, and will make bank inspections
at the Head Office or at any branch considered necessary at least once a year
and possibly oftener. But we want to make it function so that the public will
generally understand that an inspector going into a bank at any time to inspect
it is not an indication that there is anything wrong with the bank. The danger
in the past has been that if you sent an auditor in, at once there was a suspicion
created against the bank. We want to make it function now so that it will be
186 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
an ordinary and common thing for the bank inspector to drop in any time, and
the public will consider that the Department is simply doing its duty. Along
general lines, that is what we have in mind and what we are trying to work
out, and a proposition will be submitted to this Committee within a very short
time. I should be very glad to have Mr. Neill come before this Committee so
as to get the bankers’ point of view. I do not see any objection to that; indeed,
I can see where it will be helpful.
Mr. Macuean: Might I make another suggestion? I would like to ask
the Minister of Finance this question, calling his attention to the class of
officials who have appeared here from the United States—I would suggest to
the Minister that some of us are thinking over the appointment of some kind
of an official, something like them, who would consolidate the office of the
Receiver General, and the Head of Banking Inspection, and things of that kind,
and we would have to have responsible officials of the highest class. I would
give him $10,000 or $20,000 a year for his services—
The CuarrMaAn: We are not proceeding in order. If Mr. Ross will advise
us when Mr. Neill can be here—
Mr. Ross: Mr. Neill is in New York to-day, but I can communicate with
him and he will attend at such time as the Committee finds convenient.
Mr. Irvine: I suggest we have the Government proposition and then call
Mr. Neill and we can see what objection .they have to it.
Hon. Mr. Ross: Who is Mr. Neill?
Mr. Ross: Acting President of the Canadian Bankers’ Association, and if
I might be permitted, I would suggest to the Committee that the statement of
the Minister regarding Mr. Neill being in a position to make some suggestions
in regard to this amendment, is a good one.
Hon. Mr. Ross: I would like to hear Mr. Neill.
Mr. Rycxman: I notice you suggested that Mr. Neill’s evidence be limited
to bank inspection. I think his opinions would be very valuable to this Com-
mittee on other matters, and I wish we could hear him on other points as well.
The Cuamman: I think I have been quite liberal in allowing witnesses to
be questioned within the limits of the reference, and perhaps at little outside
of it.
Mr. McMaster: Giving it a broad interpretation.
The CHairMAN: Yes..
- Mr. Ryckman: Mr. Neill should know upon what we are going to question
im.
The Cuamman: If the Committee agree I would suggest that we fix Friday
as the day upon which to hear Mr. Neill. To-morrow is to be taken up with
Dr. Tory’s evidence, and we could hear Mr. Neill on Friday at 11 o'clock.
Mr. Irvine: When do you propose taking up the other part of the reference,
regarding the reimbursement to the Home Bank depositors?
The Cuarrman: I do not believe that is before the Committee at the
present time.
Mr. Irvine: The consideration of it is.
Mr. Macuxan: In regard to the extension of Post Office Savings Banks, I
offer the following notice of motion:—
“That in the opinion of this Committee the Post Office Savings Banks
System be extended by marking cheques against accounts in same at the
office of deposit.”
BANKING AND COMMERCE 187
APPENDIX No. 1
That would be a great convenience to the public, if they could mark their
cheques.
The CuairmMAN: That will remain on the table until the next sitting of the
Committee.
Mr. McMastsr: I move, seconded by Mr. McKay,—
That a report be presented to the House recommending that the
minutes of proceedings and evidence taken before the Select Special
Committee on Agricultural Conditions of last session, be referred to this
Committee.
The reason I move this resolution is that last year we obtained a good deal
of what I think was valuable information from numerous people concerning
rural credits, and as that matter comes before us this year, I think it will be
well to have these proceedings before the Committee formally so that reference
may properly be made to the evidence given and the subject matters treated in
the evidence in the proceedings of this Committee.
The Cuamrman: It is moved by Mr. McMaster, seconded by Mr. McKay,
that a report be presented to the House recommending that the minutes of pro-
ceedings and evidence taken before the Select Special Committee on Agricul-
tural Conditions of last session, be referred to this Committee,
Motion agreed to.
The CuamrMANn: I think the report of the Committee has already been
distributed with the sessional papers of last year, but I will endeavour to have a
new copy issued to all the Members of the Committee.
Hon. Mr. Stevens: You do not suggest re-printing?
The CuatrMAn: No; I think there are spare copies enough for the members
of the Committee. We had decided at the last meeting that the first witness
this morning would be Mr. Finlayson, on the subject of bank inspection. We
will hear him now.
Grorce D. Frnuayson, called:
By the Chairman:
Q. Mr. Finlayson, you are Superintendent of Insurance?—A. Yes, sir.
Q. Have you a statement to make to the Committee in respect to the intro-
duction of a government system of inspection of banks? If so, will you make it,
and then perhaps some of the hon. Members would like to ask you a few ques-
tions.
Mr. Macuran: Is this statement of his own motion or on behalf of the
Department?
The Cuatrman: On behalf of the Department.
The Witness: Mr. Chairman, I have prepared no statement regarding
bank inspection. I have not studied the bank question at all. I have had no
experience with banks. Our Department inspects every year some three hundred
odd Insurance, Trust and Loan Companies, and I had rather assumed that my
evidence would be mainly on our experience in connection with these companies
rather than in connection with banks. We have never inspected banks and have
never even scrutinized bank returns officially.
Mr. Goop: Mr. Chairman, I would suggest that Mr. Finlayson give us some
idea of the usefulness of the inspection which was established, I think, about two
years ago with regard to Trust and Loan Companies, which are somewhat
similar to banks. I think if he would give us his experience, or a statement
which would cover those points, the Committee would be assisted very much.
1—25
188 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Wrrness: Mr. Chairman, the Act authorizing systematic government
inspection of Loan and Trust Companies was inaugurated four years ago, In
1920. Prior to that there had been passed, in 1914, general Acts, the Loan
Companies Act 1914, and the Trust Company Act, 1914. Those were the first
general Acts dealing with Loan and Trust Companies of that character incor-
porated by the Dominion Parliament. Theretofore they had been governed by
a section in the Companies Act. Dealing particularly with Loan Companies
there was a provision in the Acts of 1914 somewhat similar to what is now in the
Bank Act. Section 69 of the Trust Company Act, of 1914, provided that the
Company should render annual statements to the Minister of Finance. Then
Section 70 was as follows:
“The Treasury Board, upon the report of the Minister, may appoint
some competent person as inspector to investigate the affairs and manage-
ment of the company, and shall report thereon to the Minister; and the
Treasury Board may also prescribe the manner and the extent to which
the investigation shall be conducted. It shall be the duty of all officers
and servants of the company to produce for the examination of any such
inspector all books or documents in their custody or control in relation to
the matters under investigation; any such inspector may examine upon
oath all officers or servants of the company in relation to its business, and
may administer the oath accordingly”.
The Section of the Loan Act was exactly similar. It is important to notice
that this was a permissive section, “The Treasury Board may appoint ” some
person. It required first of all a report by the Minister to the Treasury Board,
and they might then appoint some person to make a special investigation of
any particular company. Those two Acts remained in force for six years but
the provisions of those sections were never invoked, and if they had remained
in force for twenty years it is safe to say they never would have been, for the
reason that they contemplated, first of all, a report on a particular company.
During these six years it was pretty well known, I think, that there were Loan
and Trust companies that should be examined, that needed examination; yet,
for the very reason that the Minister has just mentioned in connection with the
Banks it was never done. It was felt that the moment the Government appointed
aman to go into that company, suspicion was cast upon it. If it needed examina-
tion, then there was danger of a run on the company, and the company was
probably damaged. If on the other hand it did not need examination, if the
suspicions were unfounded, then a serious hardship was imposed upon the com-
pany. In 1920 it was decided that there should be systematic, periodical inspec-
tion of loan and trust companies, and in that year the two Acts were amended
to provide that, ‘the Superintendent shall visit personally, or cause a fully
qualified member of his staff to visit at least once in each year the Head Office
of each company required by this Act to make returns to the Minister”. Since
that time, commencing with 1921, there has been an annual examination of
every loan and trust company.
By Mr. MacLean:
Q. How many officers does it take to do that?—A. One man.
By Mr. McQuarrie:
Q. Has the result been beneficial?—-A. We think so.
By Mr. MacLean:
Q. Have you corrected any abuses under it?—A. We think so.
[Mr. George D. Finlayson.]
BANKING AND COMMERCE 189
APPENDIX No. 1
By Mr. Euler:
Q. How many such companies are there?—A. Fifteen of each.
By Mr. Spencer:
Q. With 300 offices?—A. I am speaking now of loan and trust companies.
There are 30 of them altogether. Then the insurance companies number about
275 or 280.
By Mr. Marler:
Q. How many have you on your inspection staff, Mr. Finlayson?—A. We
have about 8 or 9 men altogether.
Q. To examine substantially 300 offices?—A. Right.
Q. You verify the securities?7—A. Yes.
Q. The mortgages?—A. Yes.
Q. The value of the mortgages?—A. Yes.
Q. Whether they are registered or not?—A. Yes.
Q. And the security behind them?—A. Not in every case. It is only in
a very small percentage of cases where we have to investigate values and appraise
the security, but new mortgages of every insurance, trust, or loan company
are examined within a year after they have been placed. The documents are
examined, the abstract of title, the solicitor’s certificate, and the mortgage
deed itself are examined.
By Hon. Mr. Stevens:
Q. That is, you examine the documents showing these things, in the offices
of the company?—A. The documents in the office of the company, and inquire
into the security, the land pledged, and if there appears to be reason for it we
investigate further and have an appraisal of the property.
By Mr. Marler:
Q. Do you examine at the Registry Office as to whether these particular
mortgages are in force or not?—-A. That is usually not necessary. In western
Canada we get a certificate; that shows the registration of the mortgage and
also proves the title.
Q. It does not show the cancellation, though; it might have been cancelled
previously. It might have been a registered deed of a mortgage, but you do
not examine as to whether that has been cancelled or not?—A. Not usually.
We take the ledger account. If payments are being made we may assume the
mortgage is in force. If not, we inquire why. If the loan has been repaid we
wails it has been regularly discharged. As a rule we do not inquire into dis-
charges.
Q. You take the company’s books?—A. Yes.
By Mr. Spencer:
mb If you have any suspicion you can ‘go a good deal further?—A. Cer-
tainly.
Mr. Irvine: Mr. Chairman, I rise to a point of order; has Mr. Finlayson
finished his statement, or are we going to start questioning him?
Mr. Maruer: I apologize, Mr. Chairman.
The Witness: I think I had pretty well finished, when I answered those
questions. :
By Mr. McQuarrie:
Q. Just before you leave that, would you be good enough to explain the
benefits which have resulted from this system of Governmental inspection of
[Mr. George D. Finlayson.]
1—25}
190 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
trust and loan companies, and in what way the present system is better than
the old system?—A. Of course, there was no old system of inspection; the
old system was nothing at all as far as the Government was concerned. We
received the statements, they were simply compiled from the statements ren-
dered, and they were issued in an abstract, a summary statement. There was
no attempt, no pretence of inspection. The figures were, as a rule, I think,
never altered from the statement submitted. It was found when we came to
investigate those companies that there were some investments never author-
ized, investments outside the power of the company. The company, under its
charter, or under the general Act, was given certain powers of investment. In
some cases these powers had been exceeded. Take a company, for instance, whose
powers authorized it to invest in securities in Canada, Government securities,
municipal securities, or securities of corporations incorporated by the Parlia-
ment of Canada, or within Canada. In some cases we found that government
bonds of foreign countries had been invested in. In other cases, bonds, and
securities of corporations incorporated in the United States had been invested
in. There were a number of cases of that kind. These were unauthorized
investments. In some cases they had caused loss. That, I think, is entirely
prevented at the present time.
By Mr. Maclean:
Q. They were all cleaned up, all these illegal investments?—A. They were
either cleaned up or written off; I do not say they have recovered all that
had been invested in them. There was also the question of loans to directors.
Under the old Act of 1914 loans to directors were permitted; there was no
prohibition. The Act of 1922 imposed that prohibition. As a result of our
investigation, we found that between 1920 and 1922, much of the trouble and
much of the weakness of these companies had arisen from the fact that loans
were made to the directors of the company improperly or imperfectly secured.
Under the Insurance Act since 1910 no loans to directors of insurance companies
have been permitted. Loans to directors existing before 1910, in the case of
the Insurance Act, were permitted to be continued; it was not made retro-
active. Loans placed in good faith before the passage of the legislation were
permitted to be continued, but no new loans were allowed. We followed the
same course in amending the Loan and Trust Companies’ Act in 1922; we said
that thereafter there should be no loans to directors of these companies. Loans
placed in good faith before that were permitted to remain. There is also the
question of charged interest on loans in arrears. We found that many com-
panies were charging interest on loans that were long past due. The loans
were dead, frozen. Some companies had carried into their revenue the interest
that was being charged up to these loans, interest at the original rate was being
credited and charged to the loan just as if it were being earned. In some cases
we found that dividends had been paid to the shareholders out of this charged
up interest. In some cases we found this; we found that companies with loans
in arrears had foreclosed the property and had continued to charge interest at
the original mortgage rate on the real estate account.
By Mr. Euler:
Q. Does that regulation concerning no loans to directors apply to com-
panies in which directors of the surance company may also be directors?—
A. No, we have not gone that far, sir. We realize the difficulty of going that far,
to say that a loan company shall not make a loan to any other company in which
a pera of the loan company is also a director. That is what you mean, is
it not?
Q. Yes?—A. It does not go that far. Dealing with this question of real
estate, we have found that some companies—there are very few, I must say—
(Mr. George D. Finlayson.]
BANKING AND COMMERCE 191
APPENDIX No. 1
had followed that practice, they had made a loan at 8 per cent, 9 per cent and
10 per cent, the loan had got into bad standing, and they had foreclosed. They
got a valuation of the property which was considerably in excess of the value
of the mortgage at the time of foreclosure, and they continued to charge interest
to that real estate account at the original 8 per cent, 9 per cent or 10 per cent,
notwithstanding the fact that there may have been little or no revenue derived
from the property. That, of course, we regarded as a very bad practice, and in
our first year’s examination, in all those cases we wrote back or noted this inter-
est and wrote it off the book value of the property.
By Mr. Good:
Q. You have had to revise the financial statements of these companies?—
A. Oh, very frequently.
Q. Write down their assets?—A. Yes, sir. In the case of real estate, we
have had more valuations on real estate in connection with the loan and trust
companies during the past two or three years than we have found necessary in
the case of insurance companies for the last fifteen years; mainly, I believe,
because of the fact that these loans had been carried on without proper appraise-
ment and valuation.
By Hon. Mr. Stevens:
Q. How many of these loan companies accept deposits?—A. About one
half, I should say. I can give you the exact number.
By Mr. Maclean:
Q. Roughly, what is their total deposits?—A. The deposits of the fifteen
loan companies incorporated by the Dominion Parliament, at the end of 1923
were fifteen million dollars, roughly speaking.
By Hon. Mr. Stevens:
Q. That is the aggregate?—A. That is the aggregate. Out of fifteen com-
panies there are eight that take deposits.
Q. And any of the trust companies?—A. The trust companies take deposits
but they call them “ guaranteed funds”; that is, money deposited with the com-
pany in trust for investment. The relation is not that of debtor and creditor, it
is a trustee deposit.
By Mr. Good:
Q. Have you found in any case the deposits to be jeopardized by bad man-
agement or bad accounting?—A. Well, of course, the business of the companies
as a whole has been weakened by bad investments in some cases.
By Mr. Coote:
Q. Have you had any failures?—A. No, sir.
Q. You have not had to close up any of the companies?—A. Not so far.
Q.
By Mr. Euler:
Have you authority to close up a company if you think it necessary to
do so?—A. Yes, sir.
By Mr. McQuarrie:
Q. Do you think the Government inspection has averted any disasters?—
A. It is always very difficult to say what might have happened.
By Mr. Euler: ‘
Q. Have you ever closed up a company?—A. A loan company or trust com-
any?
p Y {[Mr. George D. Finlayson.]
192 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
_ Q. Yes, as a result of your inspection, finding it is in a bad condition?—
oaNa.
By Mr. Maclean:
Q. But you made them improve their position?—A. We think so.
By Mr. Irvine:
Q. Is the inspector under a penalty to make his report annually to the Min-
ister?—A. No, it is set out by the Act, and he always has done it.
Q. Just exactly what is the power of the Minister of Finance when he gets
that report?—A. The Act as it stands now, with the amendments of 1920 and
1922 provides for the systematic yearly inspection of the companies and a report
by the Superintendent to the Minister. Then the procedure is as follows:—
“ (1) If as the result of the examination as aforesaid of any com-
pany the Superintendent believes that the assets of the company are
insufficient to justify its continuance in business, he shall make a special
report to the Minister on the condition of such company.
(2) If the Minister, after a reasonable time has been given to the
company to be heard by him, and upon such further enquiry and investi-
gation as he sees fit to make, agrees with the opinion of the Superinten-
dent, he may suspend or cancel the certificate of the company, and the
company shal] thereupon cease to transact further business. Provided,
however, that the Minister may, during such suspension or cancellation,
issue such conditional certificate as he may deem to be necessary for the
protection of the public.
(3) If the Minister deems it advisable, the said conditional certifi-
cate may provide that the company shall, during the continuance of such
conditional certificate, arrange for the sale of its assets and for the trans-
fer of its liabilities to some other company under the provisions of sec-
tions seventy-one and seventy-two of this Act.
(4) If upon the expiration of the conditional certificate no arrange-
ment satisfactory to the Minister has been made for such sale and trans-
fer, and if the company’s condition is not then such as to warrant the
restoration of the company’s certificate, the company shall be deemed
to be insolvent.”
By Mr. Euler:
Q. Do you think, Mr. Finlayson, if you had the double liability in the
Act it would be of much protection to the public?—A. I do not think it is
necessary. I am going into that largely on our experience with the insurance
companies. We have no double liability there and the insurance companies
are under a very much more serious hazard, particularly fire insurance com-
panies, than the loan, trust, or life insurance companies are. We have never
thought it would be beneficial to have the double liability on shareholders. I
should point this out, that in our revised statements we never give any credit
whatever as an asset to unpaid capital, subscribed but unpaid capital. There
have been companies that carry that into their assets and treat it as a good
asset, but we write it out.
By Mr. Irvine:
Q. Do you think, Mr. Finlayson, that the principle of insurance could be
extended to banking?—A. I should think that would be more a question for
expert bankers; I am not an expert banker or in fact any kind of banker.
Q. From your general knowledge, do you think it would be possible?—
A. I could never see any reason, as far as new transactions are concerned, why
{Mr. George D. Finlayson.}
BANKING AND COMMERCE 193
APPENDIX No. 1
inspection would not be very beneficial. As to whether bank inspection will
cure any evils that are existing now, that is another question.
Q. I did not limit my question to the principle of inspection, but to the
principle of insurance——A. You mean only deposits?
Q. No, the principle upon which insurance is organized, the co-operative
idea. —A. Most of our insurance companies are not co-operative.
Q. Are not the policy holders actually shareholders in most of the com-
panies?—A. No; we have only one purely mutual life insurance company in
Canada. All the others are stock companies. .
Q. Is not the tendency towards mutual insurance?—A. It is not perceptible
in Canada.
By Mr. Speakman:
Q. Before you leave that point, are there any trust, loan or insurance
companies operating under purely provincial charters; if so, do the powers of
your inspection extend to them?—A. No. There are quite a number of loan
and trust companies incorporated by the various provinces. In fact, the
majority of the trust companies are under provincial jurisdiction. For loan
companies, I should say it numbers about equally, half and half, under the
jurisdiction of the Dominion and under the jurisdiction of the provinces. In
the case of the trust companies, the larger trust companies are under pro-
vincial jurisdiction; I should say probably fully three quarters of the assets of
the trust companies are assets of provincial corporations, and under our con-
stitutional system in Canada the Dominion Parliament can exercise no authority
whatever over these companies incorporated by the provinces.
By Mr. Irvine:
Q. Has the inspection anything to do with the fixing of interest, or regu-
lating that in any way?—A. No.
By Mr. MacLean:
Q. On the whole, considering these companies that are under Federal con-
trol, you think it is in the public interest to continue that system of inspection?
—A. We think so. We think this; we do not say that Government inspection
has removed all the weaknesses of these companies; these weaknesses had
grown up, and Government inspection is not, in a very short time, going to
remove them. We feel, however, that so far as new transactions are concerned,
Government inspection has been and will be very beneficial.
By Mr. Coote:
Q. Does the Act limit the amount of the loan you can make, in propor-
tion to the paid-up capital of the company?—A. No, sir.
Q. Do you have any loan existing exceeding the paid-up capital of the .
company’?—A. Not to my knowledge. In fact, I think I can say definitely
there are none.
By Mr. MacLean:
Q. Are the big trust companies in Toronto and Montreal mainly under
provincial jurisdiction?—A. The larger ones are under provincial jurisdiction.
The National Trust Company and the Toronto General Trust Company—these
are the companies you were probably thinking of—are under provincial juris-
diction. The Trust and Guarantee Company is a provincial company.
By Mr. Spencer:
Q. Do they all have provincial government inspection?—A. Not all pro-
vinces. Ontario has at the present time. The province of Quebec has had an
(Mr. George D. Finlayson.]
194 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
inspection of trust companies for some years. That of the province of Ontario
is quite recent, beginning in 1921 or 1922.
By Mr. MacLean:
Q. Does that include loan companies too?—A. Yes.
By Mr. Coote:
Q. Have you inquired of the directors of those companies as to whether
they are really well acquainted as to the affairs of their own companies? In
other words, do you believe that these directors are really directing?—A. In
some cases the directors are not informed as to the condition of the company.
In some cases they are quite in the dark. It may be interesting to the Com-
mittee to know our experience in connection with companies that appear to
be developing weaknesses. Our experience with insurance companies has been
longer than with loan and trust companies, and we have developed the practice
of seeing that the directors are fully informed of anything that appears to us
to be dangerous or unauthorized by the Act. If we find that unauthorized
investments are being made, or investments that are not fully secured, or if
we think there are matters which are transpiring at the Head Office which are
not being communicated to the directors, our practice is to first of all remon-
strate with the manager, and ask him to have it drawn to the attention of the
directors. If we find that is not done, we write to the manager of the company
and have copies made of the letter, which are sent by registered mail, to every
director of the company.
By Mr. Euler:
Q. Do you not usually find that there is a small executive body chosen
to handle these affairs?—A. Very often that is so; very often the manager is
the whole board of directors, or there is a small executive committee. There
are other directors who, by nature of their location, their residence, cannot give
close attention to the company. We think that these directors should be made
aware of anything that we think is undesirable in the conduct of the company,
and I may say this, that in our experience with the insurance, trust and loan
companies, that method of supervision is 100 per cent effective, where we have
directors who are independent of the company. By that I mean directors who
are me involved and tied up to the company by loans which are inadequately
secured.
By Mr. Shaw:
Q. You have a system, have you not, of valuing securities?—A. Yes, sir.
Q. On refering to the book which you issue on the value of securities, I
notice that the last valuation of Home Bank stock is 94, and of course in reality
it is worth nothing. JI was wondering first of all how you secured these values,
and secondly in the matter of bank stock, if you have access to the other
departments of the Finance Department to get any information dealing with
banks.—A. Are you speaking of our book for 1923 or 1922?
Q. I think the one I saw was for 1922—-A. It does not appear at all in
1923.
Q. Ninety-four was the valuation, but as a matter of fact it was not worth
anything.
By Mr. McQuarrie:
Q. Do you say there was no Home Bank in 1923?—A. We did not give
any value to it.
(Mr. George D. Finlayson.]
BANKING AND COMMERCE 195
APPENDIX No. 1
By Mr. Good:
Q. When was that report issued, that 1923 report?—A. This list of valua-
tions?
Q. Yes—A. It is dated January Ist, 1924, but I think it appeared on the ©
20th or 23rd of January of this year.
ae Then it was compiled subsequent to the failure of the Home Bank?—
As Yes.
By Mr. Shaw:
Q. How do you arrive at these values?—A. The bank stocks are very
simple; we take the quotations.
Q. Have you access to the Department of Finance to get any information
they have?—A. I suppose we have, but we have never asked for it or availed
ourselves of it. We do not think that that would be as valuabie as the market
quotations. I do not think it would have been, in the case of Home Bank
stock.
By Mr. Coote:
Q. Would it not be a wise provision to state in the Trust Companies’ Act
that they should not hold bank stock, or any stock carrying with it a double
liability provision?—A. I must say that bank stock is not popular as an invest-
ment with these companies, and has not been for some years. They have
always been afraid of the double liability clause.
By Mr. McMaster:
Q. Just before we get further into this aspect of the question, there is
something I am quite clear on. Do you ever, in your department, examine trust
companies with provincial charters?—A. No, sir, we have no right to do that.
Q. For instance, you do not look into the Royal Trust Company?—A. No,
sir. I must make one exception to that. The province of Nova Scotia has
passed a Loan and Trust Companies’ Act very similar to ours, and they asked
our assistance in inaugurating the system of inspection. We did, as a matter
of fact, inspect the loan and trust companies of that province last year, but
more by way of comity between the two governments than by any authority
on our part.
By Mr. Coote:
Q. Is bank stock a trust security?—A. Yes; trust companies are authorized
to invest in it. They can invest their company funds in it, but not their trust
funds. The trust company has its own company funds, its capital and its
reserve, and they are authorized to invest that in bank stocks.
By Mr. Maclean:
Q. And loan money to brokers on bank stocks?—A. Of course, you must
remember that as far as trust funds are concerned, in the event of a deposit
being made witb a trust company, in trust for investment, if there is no
authorization given, then the Trustee Act applies, and the investment must
be made in trust securities. However, all the trust companies are authorized
to invest trust funds in accordance with the terms of the trust. The depositor
may deposit money with the trust company and sign a paper which gives
discretion to the trust company to invest these funds. With that form, the
company has practically unlimited discretion in the investment, because they
are investing in accordance with the terms of the trust.
{(Mr. George D. Finlayson.]
196 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By the Chairman:
Q. And the depositor has no further security than a depositor in an
ordinary bank?—A. That is so, where they deposit the money on those terms,
and that is one of the things we have tried to tighten up in this Trust Com-
panies’ Act, in our amendments of 1922.
By Mr. Coote:
Q. Do not these trust companies invest a lot of money in real estate mort-
gages?—A. Yes; that is a trustee security.
Q. A large percentage of their money?—A. A large percentage.
Q. What is your experience in connection with the loans made by some
of these trust companies on western real estate? Have they not sustained
very large losses?—A. Yes, some of them have sustained losses; some of them
have written off interest, some written off principal. They have foreclosed and
taken their losses.
Q. Have you sent your examiners to the western offices of any of these
companies?—A. In some cases.
Q. To inquire into the real security behind these mortgages?—A. Yes.
By Mr. Shaw:
Q. You have suggested that the person who deposits money on trust is not
in the position of debtor and creditor; that relationship is not established.
What I want to ask is, would it not be possible to extend this same principle
to the banks to some extent, and in that event the depositors might have a
preference instead of as at present, where they are unsecured creditors ?—
A. They have a preference now.
Q. Not the depositors?—A. As against the shareholders.
Mr. McMaster: Yes, but they have that in any company.
By Mr. Shaw:
Q. Suppose you go to a trust company with $1,000 with instructions to
them to invest that either in your name or their name, and they invest it in a
particular way; the benefits of that come to you entirely, and if the company
failed you are perfectly secured so long as your security is there. Is that not
true?—A. So long as the security is all right, that is first rate; but supposing
that the security specially allocated to this particular account is bad in the
event of failure, the depositor is worse off than if he had a general claim against
the assets of the company. It works both ways. But according to your
method, if the company got into difficulties and became insolvent, say, your
depositor has to fall back upon his particular security. That security may be
the worst in the bunch, and he will suffer more than if he took his lot among
the other depositors on the general assets of the company.
By Mr. Spencer:
Q. Under Government inspection his security is liable to be pretty good?—
A. We think there is a fair chance of it.
By Mr. W. F. Maclean:
Q. Is there any way by which the trust and loan companies of the country
could come under Federal jurisdiction?—A. Only by an amendment of the
British North America Act.
Q. You would not care to give an opinion as to whether that is desirable or
not?—A. Our opinion might be biased.
{Mr. George D. Finlayson.)
BANKING AND COMMERCE 1o7
APPENDIX No. 1
By Mr. Shaw:
Q. There is some interesting reading in the evidence given in connection
with the Home Bank in which I notice that that bank was tangled up with a
company called the Prudential Trust Company. That company had financed
a large amount of money contrary to the provisions of its charter. It was an
ultra vires transaction. Have you any knowledge of that particular matter?—
A. Yes, it has come to my knowledge.
Q. Can you disentagle that for the benefit of the Committee?—A. As far as
I can see, it is a very complicated transaction; there is no doubt about that. It
ultimately took the form of a trust investment or trust deposit of money for the
purpose of investment, but with practically specific instructions to invest it in a
particular security.
Q. Are you speaking now of the Prudential Trust Company?—A. Yes.
We say that that is inconsistent; we say it cannot be a guaranteed investment, a
guaranteed trust investment, when there is absolutely no discretion left to the
Trust Company in the investment of its funds. In that case, we say the com-
pany was acting as agent. It had no discretion. It got a deposit of money
nominally in trust for investment, but it was told to invest it in a particular
security. Therefore, we say there could not be any guarantee; it was an agency
transaction.
By Mr. W. F. Maclean:
Q. Government bank inspection might have checked that in connection
with the bank?—A. I think it would.
By Mr. Healy:
Q. What rate of interest do the loan companies usually pay on savings
deposits?—A. Usually 4 per cent.
Q. The difference between 3 and 4 per cent would be one per cent. Do you
think that that could be set aside to insure the savings deposits?—A. I really
can not say.
Q. Would your actuaries be able to tell us that?—A. If you would tell me
what the premium would be in the insurance of savings deposits—
Q. It is the difference between three per cent and four per cent; that is one
per cent a year?—A. What is the net premium for insurance of savings deposits?
That is what it would come to. It is not an actuarial problem because there is
no experience that I know of that would guide us as to what the risk involved is.
You would have to find out the risk to know the benefit given by an insurance
company or by the Government.
Q. You have had 20 years experience with regard to the chartered banks in
Canada?—A. That would have to be gone into; I cannot say off-hand what that
experience is.
Q. Could it be done?—A. All I can say is that I do not think it has been
done successfully.
Q. We have never tried it in Canada?—A. No; I am informed that some
States have. I have no official knowledge; I have never investigated to find out.
By Mr. Good:
Q. As to the percentage of losses?—A. Yes. If you want to find out the
premium that would have to be paid, you would first of all have to get the risks
and the value of the benefit. After that, it would be a very simple matter to
work out the annual premium for the insurance. I do not think that are statis-
tics that would justify any one in making a computation. This has never come
to my attention.
(Mr. George D. Finlayson.]
198 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Coote:
Q. The financial conditions fluctuate so much between different periods, that
you think it would be advisable to determine what the risk is?—A. I think so;
I do not see how it could be done scientifically.
By Mr. Spencer:
Q. You say that before the Government took over the inspection of trust
and mortgage companies they were obliged to send in monthly returns to the
Minister of Finance?—A. Not monthly, yearly.
Q. Yet when the time came when it was decided to have inspection you
found there were a lot of remedies needed?—A. Yes.
Q. Would I be correct in saying that there was about the same attention
given to the returns of the loan and trust companies by the Finance Depart-
ment as is now given to the returns from the banks, that otherwise, the returns
were just compiled and advertised?—-A. Yes, I think they were just compiled,
there was no authority to alter a statement. There was no authority to the
Minister or to any official of the Department to write off unauthorized invest-
ments or anything of that sort. They practically had to accept the statements
as they were officially submitted.
Q. Then it is quite possible that if we have a Government inspection of
banks, that Government inspection will be of the same benefit to the present
banking system as the Government inspection of mortgage, loan and trust com-~
panies has been to those companies?—A. I cannot speak as an expert banker.
There may be some peculiarities in the banking system. I think, however, that
prima facie that is true; there would be a benefit. Following up that question,
I would like to point out that there is a vital difference between the assets of
insurance, trust and loan companies, and the assets of banks; mainly in this;
that in those companies we give no consideration whatever to personal security.
Our insurance, trust and loan companies are permitted to make loans on col-
lateral. We value that loan strictly and value the tangible security pledged.
If we cannot find sufficient value in the tangible security to cover the loan, a
deduction is made or the loan is wiped off. A man of great resources may have
a comparatively small loan from one of those companies—
By Mr. McQuarrie:
Q. What do yu mean by it being wiped off?—A. If the security pledged is
worthless, we simply disallow the loan entirely, regardless of the value of the
borrowers’ covenant.
By Mr. Hughes:
Q. You mean it is written off?—A. Written off. We give no consideration
whatever to the personal security of the borrower.
By Mr. McQuarrie:
Q. But the borrower will have to pay?—A. He is retained on the covenant,
but we do not rely on it. In our revision of the statement we say that if the
tangible security pledged becomes worthless, the loan is worthless, from our
standpoint. We do not give any credit for the personal covenant. We are
required to do that. In the case of the banks, of course, that is altogether
different. A bank loans on personal security, and on the security of all kinds
of assets. It is interesting to note the constitution of the assets of our Canadian
life insurance companies. At the end of 1923, real estate was three per cent
of the total. That almost exactly agrees with the banks. There is also about
three per cent of their assets in real estate. We have in the life companies,
mortgages 25 per cent; policy loans, that is, loans on the security of the com-
{Mr. George D. Finlayson.]
BANKING AND COMMERCE 199
APPENDIX No. 1
panies’ policies, 14 per cent; bonds and debentures, 45 per cent; stocks, 44 per
cent; cash, one per cent; agents’ balance, three per cent. That is really the only
item where personal security enters at all. The company has a certain balance
due from those agents and the agents must be assumed to be good for it.
By Mr. Healy:
Q. What kind of stocks are they permitted to invest in?—A. The stocks
of companies in the case of insurance companies and loan and trust companies
as well; stocks which have a dividend-paying record.
Q. Industrial stocks?—A. Industrial stocks. In the case of preferred
stocks, they have to show dividends for at least five years; in the case of com-
mon stocks, they have to show a continuous dividend-paying record of at least
four per cent for seven years before they are eligible for investment.
By Mr. Coote:
Q. I noticed that one company had approximately one and a half million
dollars in common stock in an industrial corporation, and that it was practic-
ally all watered. Do you think that that is a proper investment?—A. What is
it worth now? It might have been watered originally. Our valuation, we
think, covers that. We say, ‘“‘ What is it worth at the present time?” And has
it that dividend record, a continuous dividend record of seven years. That is
really a very drastic condition. It is surprising how few common stocks
measure up to that standard.
By Mr. Good:
Q. Suppose the dividends are not paid but are placed in reserve. The com-
pany would be in a stronger position than if they had paid the dividends?—A.
That is true; this requires payment. .
Q. In that respect is it defective?—A. There is something in that; it is
hard to tell where a company places it in reserve whether it is a real reserve
or fictitious.
By Mr. McQuarrie:
Q. Could your department take over the inspection of banks?—A. I should
think not. I think it is work for an expert banker.
By Mr, Euler:
Q. Do you inspect all the branches of the companies throughout the coun-
try?—-A. No, sir. We have found this in the case of insurance companies—I
think it is safe to say that we have never inspected a dozen branches of all the
companies over all the vears of our experience.
Q. Just the head offices?—A. Just the head offices.
Q. I think you said that one man did that, and that later nine men were
reguired?—A. The first cuestion was asked wich respect to the loan and trust
companies. To-day we have thirty, and I said that one man conducts this
examination.
Q. It is a head office investigation?—A. Yes, and in some cases, loan and
trust companies’ branches, important branches where there are assets being
administered. } P
Q. And the nine men?—A. They examine the insurance companies.
By Mr. Coote:
Q. Is there any limit to the rate of interest which those companies can pay
or to the rate of interest which they can charge?—A. No limit whatever.
(Mr. George D. Finlayson.]
200 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Shaw:
Q. Do you change your auditors around from time to time?—A. As a rule,
yes. We like all our men to get experience of all our companies so far as
possible; we realize the advantage of experience in this work.
By Mr. McQuarrie:
Q. What increase do you think it would involve in your staff to enable you
to take over the inspection of banks?—A. I have never given any consideration
to it, Mr. McQuarrie, I am really not able to say. As I have said, we have
had no experience whatever with banks; we are not bankers.
By Mr. W. F. Maclean:
Q. Would you be prepared to say, inasmuch as we have branch banks in
Canada, whether a system of bank inspection would have to include the inspec-
tion of branches as well as the inspection of head offices?—A. I could only
answer that by analogy with our other companies, and I cannot see that the
inspection of branches should be necessary. It seems to me that the weakness,
in our experience, has all developed with the large transactions; and no matter
where those transactions have been entered into, everything about them is known
at the head office.
By Mr. Shaw:
Q. Was there any opposition at the outset to the inspection of the loan,
trust and insurance companies?—A. I was not here at the outset, but to judge
from the records, I do not think there was any really serious opposition.
Q. Do the companies favour it now?—A. I think they do as a rule. There
may be an occasional dissent, but I think it is fairly well accepted. It is rather
interesting to note some of the comments recorded in Hansard in 1875 when
inspection of insurance companies was first suggested.
By Mr. Hughes:
Q. Does the Government pay the salaries of your men, or do the com-
panies pay any part of it?—-A. The government pay the salaries, and an assess-
ment is made on the companies for the amount of the total expenses.
Q. What do you mean by expenses?—A. Everything. The entire expenses
of this Department is defrayed by an assessment upon the insurance companies.
By Mr. W. F. Maclean:
_ Q. They have to pay without making a kick?—A. As a rule, there is no
objection.
By Mr. Healy:
Q. Is there available, and I suppose there is—the total amount of deposits
over a period of 20 years in the chartered banks of Canada?—A. I should think
that oe fs a eee in our records.
. Also the total losses during a period of 20 years in deposits b i
of chartered banks?—A. I should think that that rt on Fetonh Pome
Q. Could you, from those two statements tell us what percentage of interest
on deposits would have to be set aside in order to insure savings deposits from
now on, say?
Mr. Goop: Assuming that the losses in the future would be the same as in
the past.
Mr. Hearty: We are hoping that they will not be so many.
Witness: If you could assume that the losses in the future in the next
20 years were going to be the same as the losses of the past 20 years, you could
in the way you suggest, find the percentage. : :
(Mr. George D. Finlayson.]
BANKING AND COMMERCE 201
APPENDIX No. 1
By Mr. Healy:
Q. Could you file with the secretary a statement of those two facts?—A. 1
could get it from the Department of Finance; possibly it is on record already.
Q. The reason I am asking you is that it is the business of an insurance
actuary to give the figures?—A. I would not say that it is the business of insur-
ance companies, because, so far as I know, in no place in the world do the
insurance companies insure deposits, the ordinary deposits in chartered banks.
Q. We have now in Ontario a bank which has the Government behind the
deposits, and which pays four per cent?—A. Yes, that is a Government bank.
Q. What some of us would like to find out in the event of the banking in
this country getting into the hands of the Government—we find this particular
government bank paying four per cent on insured deposits, while the chartered
banks are paying but three per cent on deposits that are not insured, and the
danger is now that the Government will go into the business of banking and
become a competitor of the chartered banks.
An Hon. Memsber: Let it go.
Mr. Hearty: That would be a very bad thing. I think some of us have an
idea that some of the savings deposits might be insured so that the chartered
banks will retain those they have without losing them to the Government bank.
Mr. W. F. Macuran: Do you not know that the Government in the United
States is issuing savings certificates now at four per cent?
Mr. Heaty: I am talking about banking in this country.
Mr. Goon: I think Mr. Finlayson understands the question. It will take
him a little time to work it out.
Witness: I have not the figures at the present moment.
By Mr. Euler:
Q. Do you know of any private institution organized for the sole purpose
of insuring deposits?—-A. I am almost sure there is not. In the United States,
insurance companies do in some cases insure deposits of a certain character.
That is, there are deposits made with banks in the United States in pursuance of
some statute, and there are public bodies, such as trustees and corporations,
school districts, and that sort of corporation, which are required by the statute
under which they are operated to have deposits with the bank insured. In that
case the guarantee insurance companies do insure them. The funds of some
States, possibly all, are required, when deposited with a bank, to be insured, and
the insurance companies take that risk; but such a thing as the insurance of the
deposits of the ordinary public by an insurance company, is I think, unknown in
the United States.
By Mr. McMaster:
Q. Do you know the premium that is charged by such companies on those
deposits?—A. I have it on file, Mr. McMaster; I would not like to say off-hand.
I am speaking only from recollection. I could easily obtain it for the Committee.
Q. Is it a very heavy premium?—A. No, it is a comparatively light
premium.
By Mr. Good:
Q. It would not be one per cent?—A. I think it approximates one-half that.
By Mr. Shaw:
Q. Mr. Williams told us that $25 would insure $1,000,000 of deposits?—A.
That is on the experience of losses in deposits.
Mr. Goop: Mr. Finlayson can file what information he can get.
[Mr. George D. Finlayson.]
202 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Witness: I can file a statement on the guaranteed deposits in the United
States by the guarantee insurance companies.
By Mr. Spencer:
Q. Since we have had government inspection of trust and mortgage com-
panies, have depositors lost any money at all in Canada?—A. No, sir, not so
far as Dominion companies are concerned.
By the Chairman:
Q. Did they lose any before that?—A. There have been deposits lost in
Canada.
Q. In trust and loan companies?—-A. By the failure of trust and loan com-
panies. I was going to read to you a paragraph I have here regarding the origin
of inspection of insurance companies. The first hint of regulation antedates
confederation. In the province of New Brunswick there was a provision which
dealt with foreign insurance companies coming into the province. There was a
requirement for registration, and the filing of annual statements. In the old
province of Canada, in 1860 or 1863 there was a similar provision, and also a
provision for the deposit of $50,000 before obtaining a license. After confedera-
tion, in 1868, the same provision was carried into the Dominion Statutes. That
went on until 1875. There had been several failures of insurance companies in
the United States, and the public apparently, had become more or less disturbed,
and in that year a systematic inspection of insurance companies was under-
taken by the Act passed in 1875. Then in 1877 it was extended. In 1875 it was
applied to five insurance companies, and in 1877 it was extended to life insur-
ance companies, and in the case of foreign companies, the principle was adopted
of requiring the assets to completely cover the liabilities in Canada, the liabili-
ties to the Canadian policy holders. It is interesting to note that the origin of
insurance inspection in Canada was for the purpose of dealing with the foreign
company coming into Canada, not with the native Canadian companies. The
order was that the foreign company was first dealt with, and then, apparently
in order that there might be no discrimination, it was extended to the native com-
panies. In 1875 when the first suggestion was made, I find this in the Han-
sard:—
“The efforts which have been made to obtain the greatest security
for the mass of the people depending upon life insurance by Government
inspection have proved in some very important instances to be quite
abortive.”
There had been inspection in the United States prior to this date.
“The circumstances which have taken place in the State of New
York in connection with some of the largest and most important life
insurance companies doing business on this continent and in Canada, have
shown how utterly hopeless it is to expect to obtain security for the
public through the agency of Government inspection.”
Mr. McMaster: That has a familiar sound.
Mr. SHaw: What is the name of the gentleman?
Witness: (Reading):
“Institutions supposed to be the most reliable, supposed to be the
most deserving of public confidence, have crumbled away and left vast
numbers of people who have paid enormous sums of their private moneys
to those companies without the hope of securing the comfort to their
families when they are obliged to leave them behind that they expected
to do. Those institutions have crumbled into dust and caused wide-
[Mr. George D. Finlayson.)
BANKING AND COMMERCE 203
APPENDIX No. 1
spread misery and misfortune throughout the country. I think the time
has arrived when it has become the duty of the government seriously
to entertain the question of giving some more direct, some more absolute
certainty to persons investing their money in life insurance.”
Mr. W. F. Maciean: And banks.
Witness: He went on to suggest the guarantee of life insurance policies
by the Government. That suggestion was discarded, and the system of Govern-
ment inspection was inaugurated in 1875, fifty years ago; and to-day, not a
policyholder in any Canadian life insurance company has lost one cent.
By Mr. Euler:
Q. Does your inspection extend to fraternal insurance?—A. Yes.
By Mr. W. F. Maclean:
Q. Is there any place in the public accounts which shows what your depart-
ment draws from the companies you inspect? You say that they pay the
expenses. Is that shown in the public accounts in any place?—A. Oh, yes, the
cost of the maintenance of the department at the present time, including salar-
ies, expenses and everything else. .
Q. Would the Minister of Finance or any one else, be able to tell us what
the cost would be to the country if following the example of the insurance com-
panies we put the cost of banking inspection on the banks themselves?
Mr. McQuarriz: If it is done in the same way.
Mr. W. F. Macizan: If it is done in a perfect way, the banks ought to
pay for it.
Witness: The expenses of the department are provided in exactly the
same way as those of any other department. They are placed in the estimates
and appear in the public accounts. But we strike an assessment upon all the
companies in proportion to their premium income for the preceding years and
they contribute rateably to the entire expenses. The expenses of the Depart-
ment amount to about $100,000.
By Mr. Hughes:
Q. Is that paid to the Receiver General?
By Mr. McMaster:
Q. How much did the inspection cost those companies last year, about?—
A. Last year the entire expenses of the department amounted to about $100,000.
Q. But surely there are certain expenses of the departmnt which are not
entirely applicable to the investigations which you gentlemen make?—A.
Nothing substantial, nothing worth talking about.
Q. Amongst how many companies, mortgage, trust and insurance, is the
amount divided?—A. It would be divided approximately among 300. At pre-
sent, the assessment is rated on the insurance companies only. We have in
mind extending it to the trust and loan companies, as soon as we can ascertain
approximately a permanent basis of proportion. I would say that the cost to
the trust and loan companies would not exceed five or six per cent of the total.
The contribution of each company is shown in our published report, at the bank.
Here is the assessment upon the fire insurance companies—
Mr. W. F. Mactean: Just give us the page?
Wrirness: Page 97 (a) at the back of our report; Volume 1 for the fiscal
year ending 1922. The largest amount contributed by a fire insurance company
was $1,476 for that year. The contributions of the life companies are probably
{Mr. George D. Finlayson.]
A. Paid to the Receiver General.
1—26
204 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
a little larger. This is found on page 135A of Volume 2, Business of the Year
1922; the largest amount paid by any company was $10,000.
By Mr. Spencer:
Q. What company was that?—A. The Metropolitan Life.
Mr. Goop: Mr. Chairman, I would like to hear from Mr. Finlayson his
opinion as regards giving publicity to these reports. There is a certain amount
of information given to the public, he speaks of making reports to the Minister
of Finance, but we have had various witnesses dealing with the question of the
propriety of making public certain information regarding banks, and I would
like Mr. Finlayson’s opinion as to the dividing line between giving information
to the public and the information which ought to be given confidentially to the
Minister of Finance.
The Witness: We give the very fullest publicity in our report, as any
Member can see by referring to it. We think that is desirable. Practically every
asset of every company is shown here in detail with the book and the market
values—the market values being our values. We think that is desirable because
our appraisement of the assets may be wrong. While we try to get appraisals
as authoritatively and independently as we can, still they may be wrong and we
like to feel the public has the opportunity—
Mr. Goon: To challenge it?
The Wirness: To challenge it, and if it is wrong to correct it in their own
judgment, so we attach the very greatest importance to the fullest publicity of
the companies’ statements. Whether that is possible in the case of a bank I
would not like to say.
By Mr. Maclean:
Q. It keeps you up on your toes?—A. Well, possibly; it is a good thing
for the companies and a good thing for the public.
By Mr. Hughes:
Q. These are permanent investments?—A. These are permanent invest-
ments, and there is a very vital difference between the assets of an insurance
company and those of a bank. As I was proceeding to say, I have here the
investments of Canadian life insurance companies, which shows that probably
97 per cent are tangible securities capable of the fullest appraisement, while
only three per cent had any element of personal security. Now, when you come
to a bank, of course, the situation is very different. You have ordinary current
loans—
Mr. Huaues: It is reversed, of course.
The Wirness: You have current loans and discounts amounting to 50
per cent of the assets.
By Mr. Hughes:
Q. They are changing from day to day. Then you have a large amount
of loans pledged collateral, but in the case of a bank you have to look beyond
the collateral; you have to look to the personal security behind it.
OPOn commercial paper?—A. On commercial paper, yes; so I say that 75
per cent of at least of the bank’s assets are of that character where the element
of personal security enters, while in the case of an insurance, trust or loan
company, 95 per cent are of the other character.
Q. Would it not be possible to treat them in the same way?—A. There is a
very, very vital difference.
{Mr. George D. Finlayson.]}
BANKING AND COMMERCE 205
APPENDIX No. 1
By Mr. Maclean:
Q. There is a way of treatment for each loan?—A. Yes, insurance companies
trust and loan companies are in that respect practically identical, but wher
you come to a bank you have a different class of security and assets altogether.
The Cuatrman: Are there any further questions the hon. members would
like ‘to ask Mr. Finlayson?
Mr. McMaster: I do not think we should close too suddenly.
The Cuarrman: Mr. Finlayson will always be available if the hon. mem-
bers would like to put any further questions to him.
Mr. McMaster: I think, Mr. Chairman, I am only expressing the feelings
of all the members when I say how very much obliged we are to Mr. Finlayson
for coming here and for the very excellent information he has given to us.
Witness retired.
The Committee adjourned.
CoMMITTEE Room 429,
Hovusr oF CoMMONS,
Wepnespay, May 28, 1924.
The Select Standing Committee on Banking and Commerce met at 11.00
o’clock a.m., the Chairman, Mr. Vien, presiding.
The CuairMAN: Are there any communications this morning? Any notices
of motion?
The CuarrmMan: I must inform the Committee that yesterday I moved
in the House the concurrence of the House in the seventh report of the Com-
mittee, and that is was ordered:
“That the Minutes of Proceedings and evidence taken before the
Select Special Committee on Agricultural Conditions last session be
referred to this Committee.’
All the available copies of the report of the Select Standing Committee on
Agricultural Conditions of last session are now on the table and if hon. members
would like any copies they are at liberty to take one. I do not know whether we
have enough for every member of the Committee but I think quite a number
of you will find in your books of last session a copy of these proceedings.
Mr. McMaster: They contain very valuable information.
Mr. Maciean: Have you any other report to submit to the House to be
voted upon?
The CuarmrMAN: Yes, there is the report in respect to the Federal Reserve.
Is that the one you mean?
Mr. Macutean: Have you not two reports before the House, one of which
was adopted?
The CHAIRMAN: Yes.
Mr. MacuEean: What was the other one?
The CuarrMan: It is the sixth report in respect to the study of the pur-
pose, organization and operation of the Federal Reserve Bank.
Mr. Mactean: We have not got the authority of the House vet to take
that up.
1—263
206 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The CuamrMan: We were to move the concurrence of the House this after-
noon, but as it is Wednesday, and we are not sitting after six, some hon. mem-
bers thought it advisable to postpone it. We could have taken it on Friday.
Unfortunately many members who expressed a desire to speak on the motion
will be absent on Friday; they leave by the early afternoon trains; and Tuesday
is a holiday, and therefore, it will go to either Wednesday or Thursday of next
week before we can move the concurrence of the House.
Mr. Macitean: Unless we do it to-day.
The CHAIRMAN: Unless we do it to-day, but several hon. members have
objected to it. I have not the slightest objection in moving it to-day, but I
understand that several hon. members have serious objections.
Mr. Goop: Mr. Chairman, I object. I registered my objection to you, and
{ think a number of others object. We wind up to-day at six o’clock, and it is
a foregone conclusion if it is objected to that we would not reach a vote to-day,
and the whole matter will be hung up. I think that is a sufficient objection.
The CHARMAN: If the motion is defeated to-day it goes to the foot of the
Order Paper, and I think Mr. Good is right in this, and that is why I yielded
to his suggestion that occasion should be afforded to all the hon. members to
speak on the subject, and that they should have full opportunity for doing
So.
Mr. McMaster: One of the Press men reminded me that Mr. Graham brings
in his statement on railways to-day, and that will certainly take up a great deal
of time.
The CHatrmMan: I have a notice of motion from Mr. Hodgins as follows:
“ Resolved that Section 131 of the Bank Act be amended so that gov-
ernment deposits will not have precedence over private deposits.”
This will remain on the table until the next sitting. Are there any other
notices of motion?
Mr. Macurean: I am willing to have mine come up—number six.
The CHarrMan: I invite all notices of motion so that they appear on the
Order Paper for next sitting, but it is understood we will go through the evid-
ence of the witnesses summoned before we take them up. On Friday it is under-
stood we meet at half-past ten in respect to the Act respecting the General
Animal Insurance Company of Canada, and at 11 o’clock we will hear Mr. Neill.
Gentlemen, we have the pleasure of having with us Dr. H. M. Tory, Presi-
dent of the University of Alberta, Administrative Chairman and of the Hon-
ourary Advisory Council for Scientific and Industrial Research. He was in-
structed by the Minister of Finance to prepare a report on the question of
agricultural credits. The report has been printed and distributed, and it
appears as sessional paper No. 142 of 1924. I suppose we might ask Dr. Tory
to make a statement, and if any questions suggest themselves to hon. members,
they will be free to ask them when the Doctor has finished with his statement
to the Committee, if that is agreeable. I think we will make more headway
that way.
Mr. McMaster: Is that the way Dr. Tory would like to proceed?
Dr. Tory: Yes, Mr. McMaster.
The Cuatrman: Therefore, I would request you gentlemen to kindly re-
frain from putting any questions until Dr. Tory is through with his statement.
Mr. Macuean: We ought to get through with him to-day.
The CuatrMAN: Have you any idea how long it will take, Doctor?
Dr. Tory: I am here to-morrow and the next day.
BANKING AND COMMERCE 207
APPENDIX No. 1
The CHAmRMAN: We will do our best, and see how far we have progressed
at one o’clock.
Dr. H. M. Tory, called, sworn and examined.
By the Chairman:
Q. I would suggest, Doctor, that you give us your qualifications, which I
am sure will be interesting to the members of this Committee—A. M.A., D.8c.,
LL.D., F.R.S.C., F.R.H.S.—
By Mr. McMaster:
Q. What does F.R.H.S. mean?—A. Fellow of the Royal Historical Society;
President of the University of Alberta, Administrative Chairman of the Council
of Scientific and Industrial Research for Canada.
Mr. Mactrean: And a member of this holy family?
Mr. McMaster: But in a very restrictive sense. Mr. Chairman, I think
you ought to ask Dr. Tory what he has done.
By the Chairman:
Q. What have been your activities in Canada in regard to agricultural
credits?—-A. I was a member of the Commission sent by the Alberta Govern-
ment to Europe in 1913 as part of the American Commission on Agricultural
Credits, and assisted in the report which was afterwards published by the
Senate of the United States, as a Senate document on agricultural credits in
Europe. That was my main activity in connection with agricultural credits.
I made a report to the Alberta Government in 1914 on the subject I am now
discussing with you. That report dealt only with the European situation.
There were no general schemes of agricultural credit in existence in America
at that time. We were working therefore, on European methods for the purposes
of securing information.
Q. And since then, Doctor?—A. Since then I have been President of the
Alberta University and have taken continuous interest in this subject, but until
appointed to do this work I had not been officially connected with agricultural
credits in any way.
Q. When were you appointed?—A. August 28rd, 1923.
Q. By a letter from the Minister of Finance?—A. Yes.
Q. Giving you your instructions, which appear on page seven of your
report?—A. Yes. In interpreting the instructions given to me by the Minister
of Finance, I understood them to mean that he wanted me to bring together
information on systems of agricultural credit, as requested by this Committee,
or the Committee on Agriculture last year, and his letter to me was accompanied
by a document which I have printed in this report, and which was the final
finding I think, of the Committee on Agriculture last year, commending a
further study of the problem. I may say, Mr. Chairman, that while I was
asked on August 23rd to do this work, it happened that I was on my holidays
and was not able to actually get to work until about the 1st of November, so
that the report, as now in the hands of the Committee, has been done under
rather strenuous conditions, in order as requested by the Minister to get it
before Parliament this year. This is my apology for any errors in form which
may appear, as the result of searching a great many documents, and continuous
writing.
By Mr. Maclean:
Q. When did you present this report?—A. The letter is dated—
The Cuatrman: The date does not appear.
{Dr. H. M. Tory.)
208 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Witness: I think it was April 4th.
Mr. McMaster: Is it worth while spending time on that?
The Wirness: With that interpretation of the functions of the service
which I wag asked to perform, I began by making a tour of the parts of Canada
most easily reached, beginning with my own province of Alberta and coming
east as far as the province of Quebec. I did not get to the Maritime Provinces,
and therefore, whatever information appears in this document as from the
Maritime Provinces is the result of correspondence. I was not able also to get
to British Columbia for the same reason, and, therefore, the material I have
in regard to that province is the result of correspondence, and a study of docu-
ments. After going through Canada, I went to the United States, because the
American scheme was especially mentioned in my instructions as the one to
be studied. I spent some time at Washington, going over the machinery of
rural credit organizations of the Washington Government, and then carried
letters with me to three or four of their main banking centres where I was,
able to observe the actual workings of their plans, and having done that, and
having collected all the documents which seemed to be pertinent, and having
in my possession all the documents collected in Europe in 1913, I spent some
time in bringing together all the material which you find in this report. That
will be sufficient, I think, to show the mode of approaching the subject.
Now, while it was especially mentioned in the documents that the American
system of credits warranted special study, I thought it wise in order that the
subjects might be properly understood to bring together in this document the
historical continuity of the whole Rural Credit movement. You will find on
page xlv of a list of the sections of the report. Section I dealing with general
considerations, merely defines the terms used in this report, and discusses some
of the underlying principles. I have tried to avoid technical language and to
state the facts in a direct and simple manner. Section II is a study of rural
credits in Europe. I have not tried to do more than show the historical con-
tinuity, and give a broad outline of the purpose of rural credits in Europe. I
do not think we can understand the subject of agricultural credits at all until
we have seen what was done in Europe, as the American scheme is a result of
the investigations made in Europe in 1913. Under Section III I have presented
in brief an outline of methods developed in the British Empire outside of
Canada. Section IV, which I am sure you will be most interested in, is intended
to present the machinery and the purpose of the rural credit movement in the
United States. In Section five you will find a chapter on the local Govern-
ment situation in Canada, and then some general discussion at the end under
Section VI. Now, perhaps I had better take it for granted that this document
has not been very carefully studied, and present to you in a general way at
least, the main ideas it contains.
The CHamRMAN: It was only distributed two days ago.
The Wirness: Now, looking at the subject broadly, my interpretation of
the situation is this: there have been two distinct aims in the rural credit
movement, as it existed in Europe, and now copied in the North American
continent. First to so organize the security which farmers have to offer that
a reasonable rate of interest may be obtained and second to secure both long
term and short term borrowings on reasonable terms of repayment. It was
early seen that the borrower would be greatly advantaged if instead of the
individual security there could be substituted an organization dealing with
men organized in large units, where there is co-ordination of the credits which
are offered. The rural credit movement in Europe began entirely primarily
with the idea of co-ordinating the credit of those engaging in agriculture go
(Dr. H. M. Tory.]
BANKING AND COMMERCE 209
APPENDIX No. 1
that money would flow naturally—not by forced methods—but naturally into
agricultural channels and at reasonable rates of interest. The result was that
in the early beginnings of the movement, organizations of borrowers who
pledged their unlimited security for the borrowings of all the persons concerned
were the first to be established. That is to say, 50 men who were land-
owners in a community got together and pledged their total land holdings for
all of the mortgage loans of the whole organization, arranged the amount of
money which each was to be permitted to borrow, and issued bonds on the
markets of the world—of their world at least—for the repayment of these
bonds on the basis of security which they could all give. That was the
unlimited liability idea and was the first idea behind the rural credit system
of-Europe. I am speaking now especially of long term or mortgage credit. In Ger-
many where the movement began in 1765 to 1770, after the close of the Seven
Years’ War, conditions were very much like conditions we have in this country at
the present time, or were more like conditions we had two years ago. Money
was scarce, and individual borrowing was the method. Men were going
bankrupt, large landowners, because of their inability to secure money to carry
on their businesses. Some organized scheme of credit was absolutely necessary.
There was no desire to force money into unnatural channels, but to create a
security which would cause money to flow naturally into these channels. That
they succeeded in that in Germany is shown by the fact that 50 years after-
wards, when the securities of the towns and cities and the Government of the
German States went down, if my memory serves me, when 4’s went down to 20,
the bonds of these organizations never went below 50; as late as 1920—in this
century—the bonds of many of these organizations (The Landschaften), which
are really mortgage loan companies, their 4’s were still being quoted a little
above par. I do not know what has happened since 1920, but that will give
an indication that money found its natural outlet in those organizations
because people who had money to lend were satisfied with the security, and were
willing to lend at rates commensurate with the security. At no time since their
inauguration, have I been able to find that these organizations could not borrow
money as cheaply as a government of a town or city or municipality could
borrow it. That has been a result of the co-ordination of credits to enable men to
work together for the purpose of borrowing. Now, in Germany, the whole scheme
is worked out in the interest of the borrowers. That is to say, the borrowers
give all the guarantee, and if there are any profits made, they are made in the
interests of the organizations to which they belong. There are no dividends to
private investors except fixed interest on bonds purchased. Investors lend the
money as they would lend it to a government, and they get the interest; any
profits as the result of operation go to the organizations themselves.
In France you find a different state of affairs. The corresponding organiza-
tion in France, is called the Credit Foncier, which is an organization under
legislative control with a certain grant made by the government originally to
give it a start. I think the total amount was 10,000,000 francs, which were
granted to put the Credit Foncier on its feet. It is a joint-stock company
managed like a private company but its interest charges are regulated by the
Government. I mention Germany and France to you because their institutions
are types of the two forms these organizations have taken. That is to say,
organizations of borrowers in their own interest, therefore, in their regulations,
interest charges are made as low as possible; and, the joint-stock company
organization, with regulated interest rates.
[Drie H, M. Tory.]
210 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. McMaster:
Q. By the State?—A. By the State. In France the interest charges can-
not exceed 6 per cent of the cost of the money obtained through the sale of
bonds. In all these organizations money is raised by the selling of long-term
bonds. In Germany the bonds are often non-redeemable; there is no real fixed
term when they must be repaid. In France the bonds may run for 70 years.
There is a fixed rate of interest in a definite relation to the cost of obtaining
money. I have not been able to get information of what the after-war effect
the interest charges have been in France. They may be different to-day. I
obtained the German information as late as 1920 but I could not get the in-
formation regarding France for any later time than I had in my possession,
which was 1914. The amortization principle applies in all these cases. That
is to say, the re-payments are made on the basis of a certain percentage
covering the period of the mortgagor. Generally speaking, it does not exceed
one per cent, but in some places it is as low as one-half of one per cent. I think
one-half of one per cent would pay a bond in 70 vears; one per cents pays it in
35 years. I have not worked out the details of that. However, the main point
I want to emphasize is that all the European plans were based on the amortization
idea. That is, the debt would be paid for out of the products of the land.
If a man mortgaged his land, it was understood he borrowed this money and
repaid the capital debt out of the earnings from the land.
The United States Commission was very much impressed with the idea of
amortization, and I think they would be inclined to say that the one thing
. that they brought from Europe that was distinctly worth-while was the idea of
amortization, on long term mortgages. In 1916, after a good deal of agitation,
the United States Government formed a plan which you will find described in
Chapter four of this report.
By Mr. Maclean:
Q. On what page?— A. On page Ixxvi. “Rural Credits in the United States.”
I have tried to give a little sketch there of the reasons why the problem became
an acute problem in the United States and as I interpreted what happened, it
is this; that in the days when lands could be bought cheaply, say at a dollar or
two dollars an acre—at first it ranged from one to three dollars an acre—the
buying of land was a very simple matter, and if one was fortunate enough to get
possession of reasonably goods lands with a market for their products, they
could hope to pay for that land within three or five years. By 1915 however
the American Department of Agriculture stated that 6-7 of all good available
land in the United States had been taken up. In the meantime the price of
land had risen from its original cost, say $1.25 an acre—to in some cases $250
an acre, and clearly the question of paying off the mortgage on lands bought at
$1.25 was entirely different from that on land bought at $250, unless a man
had resources other than the resources of his land. If he had resources that
could be made available in a period of time, he might take a mortgage and
satisfy it in that period of time, but my judgment of the matter is that almost
without knowing it the mortgage situation in the United States became a
very difficult one, because of the rapid extension of farming to the westward.
There was really not enough money available through the ordinary channels.
This was further complicated by the rise in land values and the necessarily large
capital investiment required by the individual. The result was a better credit
scheme became necessary. If you will read pages Ixxvi and Ixxvii, you will
see a little discussion on the way the mortgage business grew in the United
States. In 1913 it was estimated by the Department of Agriculture that there
were $3,599,000,000 in mortgages on farm lands in the United States. In seven
{[Dr. H. M. Tory.]
BANKING AND COMMERCE 211
APPENDIX No. 1
years that had grown to over $8,000,000,000. That is, in seven years the
mortgages on farm land had grown over 1388 per cent, which was an enormous
increase in the mortgage business of the country. That looks like a very
enormous amount, but in 1914 the total amount of farm land mortgages in
Germany was about $2,000,000,000—about + of this. When you remember that
Germany is a country of approximately 50,000 square miles—that is, pre-war
Germany; it is still smaller now—smaller than Alberta or Saskatchewan, two
of our western provinces, much smaller than the province of Ontario, you will see
that the rise of the total mortgage indebtedness is not so serious in the United
States, when you consider it in relation to the agricultural productive lands
of the United States. It is doubtful if Germany has more productive land than
great agricultural provinces like Alberta and Saskatchewan, where most of the
land is agricultural land. I have discussed, on page Ixvii, the various methods
by which these credits were obtained, to show the reasons which led up to the
establishment of what is known in the United States as “The Farm Loan Board”
with its various organizations. At the top of page Ixviii I have given the reasons
why all the arrangements that have already been created by State Governments
have not worked out to the satisfaction of the farmers. I might read this for
the sake of bringing it before you.
“With all these agencies at work it would seem that all legitimate
claims for money on farm mortgage security would be met.
That such was not the case was due to the following causes:—
(1) The high average of interest rates which prevailed, when com-
pared with the European farmers with whom the American farmer
must compete, especially in the newer settled parts of the country, the
parts least able to pay.
(2) The excessive costs connected with the making of loans, namely
legal costs, commissions, and incidental expenses.
(3) The impossibility of meeting mortgage payments out of pro-
duction of the land because of the short terms for which the mortgage
was made. This is emphasized when the increased cost of the instru-
ments and methods of production are considered.
(4) The knowledge that in other countries schemes of a national
character had been found to work well both in the national interest and
the interest of the farmer.”
Those are the four reasons which I adduced from many conversations
with men who were really behind this movement, as the reasons why they
thought it necessary to establish the Farm Loan Board. The Farm Loan Board
was adopted by an Act of Congress in 1916. The purpose of the establishment
was to create a number of Federal Land Banks. In reality they are not banks
in the sense in which we in Canada generally use the term; they are not banks
in which you deposit money, and against which you issue cheques. They are
banks for the purpose of conducting a mortgage business. Twelve of these
banks were established in 12 leading cities of America, and they were estab-
lished so as to cover the whole country, each one being given a definite part
of the country in which to operate. They were not established for the purpose
of dealing with individuals. I think that ought to be emphasized. No indi-
vidual has access to one of these 12 Federal Land Banks. He must reach the
Land Bank with an application for a loan through a local organization corre-
sponding somewhat to our local co-operative associations in Canada. That
is to say, provision is made for the establishment of 12 banks to cover the
country. These banks have under them the authority for the establishment
of local associations, the local associations being the initiators of the loans in
a given community; and take responsibility for them, the money being supplied
(Dr. H. M. Tory.]
212 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
by the Land Bank System. I have set out on page xcix, in a little diagram,
the way these banks function. You will see it there. Now, the American
Congress tried to get the same ideas into their system that were behind the
German system and the French system. They tried to combine the two ideas
into their system; that is to say, the Federal Land Banks are organizations
organized in the interest of the borrowers and in a given community a small
group of people are formed who are borrowers. They apply to the Federal
Land Bank of their district for their money. The Federal Land Bank has the
right to sell bonds to find money for the credit of the people located in their
district. There is no private money put in the Land Bank in the sense that
they sell stock in the bank. The money in there is money obtained at a fixed
rate of interest by the issue of bonds, and any profits go to the borrowers
themselves to carry on their own institutions. In this, the Federal Land Bank
System follows the system of the German Landschaften.
By Mr. W. F. Maclean:
Q. On the security of a general mortgage?—A. A mortgage of all the
property. But the local groups do not, as they do in Germany, take unlimited
liability for all their property. If a man wants to borrow $1,000 he has to
buy stock in his local association equal to five per cent of his loan, viz., $50
paid in in cash and assume responsibility for another $50. He subscribes $50
in cash and in case of loss he is liable for another $50. If he has not the money
to buy the five per cent of stock at the beginning, it is taken out of his loan.
By Mr. McMaster:
Q. Does he not buy five per cent of the stock of his local organization?
I think you said the bank?—-A. He buys five per cent of the stock of the local
organization. On that he is paid dividends. They have been paying on the
average dividends of six per cent.
The reason for the 5 per cent purchase of stock is that while the Govern-
ment put behind each one of those banks $750,000 as a security fund; that is,
$9,000,000 in all; a condition was made that the amount of loans at any time
could be twenty times as much as the paid-up capital of the bank. To begin
with they could loan twenty times $750,000. In order to keep up the capital-
ization of the bank, if a man bought five per cent of stock he was really
capitalizing his own borrowings, as the $50 of capital would secure $1,000 on
loan. So the borrower capitalizes his own loan. In addition he becomes liable
for an additional $50 in case losses are made by his association. The local
associations are really small double liability banks.
By Mr. W. F. Maclean:
Q. Is there an unlimited supply?—A. No, but so long as the land values
are in accordance with the appraisal that the official appraiser puts upon them,
any bank can build up its loans indefinitely, depending upon the borrowings
asked for. Ie really depends on the number of individual demanding loans.
By Mr. Hughes:
Q. When a loan is paid off, is the capital paid back?—A. It is paid back
and all liability to the association ceases.
By Mr. McMaster:
Q. Does not a bank sell bonds to find the money?—A. Yes, but that is a
different transaction altogether. All of the twelve banks were authorized to
make loans at not more than six per cent, and to charge not more than one
per cent above the cost of the bonds sold to get the money; so that bonds can
never be sold at a greater cost than five per cent. If they can sell for four and
[Dro EE: Me Wore]
BANKING AND COMMERCE 213
APPENDIX No. 1
a half per cent, they can loan at five and a half per cent; one per cent being
allowed for the transaction of the business. Now, it was found very soon after
the whole scheme was inaugurated that to compel those twelve banks, which
are really separate corporations working without mutual responsibility, to lend
money at the same rate of interest all over the American continent was incon-
sistent with the idea that each was to operate in its own sphere, because money
costs more in some localities than in others. So the mutual responsibility
between all of the twelve banks was ultimately established; that is to say,
they were all brought under one common responsibility, each for the debts of
the other. The Farm Loan Board has a supervisory relation to the twelve
banks. It organized a selling agency with some of the great bond houses in the
United States, and these with their central organization do the selling of the
bonds. They have sold approximately $800,000,000 worth of bonds. The figures
are in this report. They have sold them mostly in the Eastern States with the
result that they have been able to get money to lend all over the country at
the same rate of interest. On page xcix of the report you will find it set out;—
twelve Federal Land Banks capitalized at $750,000 plus the five per cent loans.
These are approached either through the five thousand local associations or
through agents in special cases. The farmers’ access to them is through any of
the local associations. In some cases, where asociations have not been formed,
he can reach them through agents, but in every case the agent takes the respon-
sibility for the debt to the Federal Land Bank. If the agent is a trust company
and if the Board lends money, through it as an agent it must assume responsi-
bility to the Federal Land Bank for the loan. It is allowed one half per cent
extra interest for doing that. So far, the American scheme of a federal land
bank is the German Landschaften. The eighty joint-stock banks, referred tc
on page xcix of the report, which function through the Farm Loan Board corre-
sponds somewhat to the Credit Foncier. They arranged for the organization of
joint stock banks into which private money would be put and which would have
certain extra privileges in loans to individuals. The farmer may approach
one of these banks directly as he would approach a private corporation. The
only precaution is that the interest rates are fixed and the Farm Loan Board
give their sanction to the sale of bonds of those banks. But they have nothing
to do with the finances of the bank. The joint stock loan banks make profits
for their stockholders.
By the Chairman:
Q. Where do they get it?—A. By subscribing at least $250,000. The
capital is subscribed and they raise additional money by the sale of bonds;
one per cent being allowed. They are privileged to do other kinds of business
as well.
By Mr. McMaster:
Q. Am I right in my recollection that many of those eighty joint stock
companies are institutions which were in the line of rural credit prior to the
formation of the Farm Loan scheme, and were allowed to come in on the under-
standing that they would allow their interest rates to be regulated by the
Government?—A. I cannot say to what extent that has been worked out. These
institutions have to conform to the regulation of the interest charges like the
Credit Foncier, which is the real secret of their position. They are to-day doing
a very large business.
By the Chairman:
Q.. Are they limited to eighty?—A. No, but they must have $250,000 of
paid up capital before they are allowed to do business at all.
[Dr. H. M..Tory.]
214 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Hughes:
Q. Have any of them got into financial trouble at all?—A. None of these.
By Mr. shaw: .
Q. Is the control of the interest rate effective? —A. Absolutely.
Q. We cannot do it in Canada, and I was wondering how they did it there?
—A. They have to sell their bonds through the central agency, and they cannot
sell a bond otherwise. Furthermore, they are under very definite regulations.
Mr. W. F. Macuean: Because the credit of the whole country is behind the
thing.
Witness: May I just say this about the credit of the country. These
organizations have no guarantee from the Government of the United States other
than the fact that it gives them $750,000 to begin with, and already they have
paid back in profits made in the business $7,000,000 of the total $9,000,000 that
was loaned originally. The United States Government has written into every
bond issue, in so many words, that these bonds are not guaranteed by the United
States Government.
By Mr. Irvine:
Q. Do you think it would be practicable for the Government to discount
the collateral of those societies. Would that not be equally effective, and at the
same time save a great deal of unnecessary expense?—A. You are speaking
of the intermediate credit; I am talking of the long term credits.
Q. No, the long term credits?—A. Based on thirty years’ experience, I do
not think you would get any banking system in the world to so discount with
moneys used for current business.
Q. I mean the Government?—A. For the moment, all I can say is that
the Government has not done it. The Government scheme has been to allow
the farmers to organize in their own interests and to put their security on such
a basis that they can get money cheaper. That money flows into the channels
for their credit as it flows in ordinary business channels. That is what the
Government is seeking to do. On page Ixxxviii you will find what has been
loaned. The Federal Land Banks, those organized in the interest of the bor-
rowers, have $865,000,000 worth of bonds outstanding, while the Joint Stock Land
Banks have $360,000,000 worth of bonds, not quite half as much as the others.
I call attention to this fact that no effort has been made to monopolise the
interest of the country by these mortgage loaning corporations, the Landsch-
aften or the Credit Foncier. All they have tried to do is to do a sufficient
amount of loaning as to have some regulatory influence upon the interest charges
of other organizations. In 1914 about 40 per cent of the farmers’ loans in
Germany were held through these organizations and the balance of 60 per cent
was held by private organizations of various kinds. I do not think there is
any doubt that the 40 per cent practically regulates by competition the interest
charges. In the United States today these two organizations, the controlling
organizations, have about $1,300,000,000—I have the figures up to the 24th Feb-
ruary—of the total $8,000,000,000. That is about 16 per cent, a good bit short yet
of the German 40 per cent. But there can be no doubt that already these joint
schemes are having a definite regulatory effect upon the interest charges made,
particularly in the good localities. So far as long term loans are concerned,
these are of two types. They have the principle of the private corporation
with the principle of the public corporation, and they have given them sufficient
government support to start them. But they have not given them any guaran-
tees other than that. I think it would be safe to say this—and this is a state-
ment made by several officials of the Government—that there is a feeling in
(Dr. H. M. Tory.]
BANKING AND COMMERCE 215
APPENDIX No. 1
the United States that these organizations having been called into being by
the Government, and having first a supervisory protection by the Government
and second, protection of the goodwill—there is the feeling that the Govern-
ment having called them into being could not allow them to be destroyed
without going to their rescue.
By the Chairman:
Q. When you say that these corporations have been created by the Gov-
ernment, do you speak of the Federal Land Banks or of the Joint Stock com-
panies as well?—A. I speak of both, both having been called into existence by
special legislation promoted by the Government itself.
By Mr. W. F. Maclean:
Q. Legislation which widened the term “bank’?—A. Yes, they are using
the term “bank” in the European sense that we have been accustomed to use
very much on this continent.
By Mr. Garland:
Q. Do you say that the Joint Stock Banks were called into being by
special legislation?—A. They were brought into being by the general Farm
Loan Act originally.
Q. Could it be called special legislation?R—A. What I mean by special
legislation is that in the same legislation which created the Federal Land
Banks authority was given for the organization under the Farm Loan Board
and of these Joint Stock Banks. Of course, the initiative had to be taken in
the latter case by individuals.
By the Chairman:
Q. I think the Committee would like to have that point cleared up. What
some of the members have in mind is that these Joint Stock Banks could
have existed before but some of them adapted themselves to the new scheme?
—A. Yes, so long as they conformed to the new law.
By Mr. Garland:
Q. It was simply a case of conforming to the law?—A. Exactly.
Q. It was not done by special legislation, they were in existence already?
—A. Not necessarily. Many of them were brought into being under that
legislation, and new organizations were started.
By the Chairman:
Q. But many of them were in existence, and they simply adapted them-
selves to the new scheme?—A. Yes, there was a reorganization in some cases
in order to conform to the law. Perhaps I have not made the point clear. In
one Act were created the Federal Land Banks to assist all borrowers. The
possibility of Joint Stock Banks, without mentioning any number, conforming
to the same law in regard to interest charges was also authorized. It was
left entirely to private initiative to bring them into being. The aim was to
embody the two ideas of the Credit Foncier which gets private money, and the
German system in which all the money is provided in the sense of its being
done in the interest of the people who borrow.
By Mr. W. F. Maclean:
Q. They have to conform to the rate of interest?—A. Yes.
By the Chairman:
Q. Is the capital of $250,000 the minimum or the maximum?—A. The
minimum.
[Dr. H. M. Tory.]
216 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Hughes:
Q. Are the bonds issued by these corporations subject to income tax?
—A. No. I am coming to that in a moment. Broadly speaking, that gives
you an outline of the scheme, but if any points in the general plan are not
clear, I would be very glad to answer any question now. If any one would
like to raise the question of organization, I have not gone into details, even
in the report as to how the appraisals of land values are made. It is all fixed
by law. I have the documents.
By Mr. W. F. Maclean:
Q. Would you tell us when the foreclosures come to be made how they
work out?
The CuatrMAN: I think the witness should be allowed to carry on.
Witness: Naturally when these banks get into operation they begin to
make loans very rapidly. Approximately—I can only give an approximate
figure—60 per cent of the loans issued under the Federal Farm Loan system
were repayment loans; that is to say, loans taken up from other companies
and taken on under the new system.
By Mr. Sales:
Q. Clearing up old mortgages?—A. Yes, clearing up old mortgages and
old indebtedness. That is specially true in the last few years when the indebted-
ness has been the refunding of old credits and debts, and bringing them under
one central organization. The majority of these loans have been issued on a
thirty-four years’ amortization scheme. If you turn to page Ixxxili you
will see an illustration of the way in which these loans are repaid. Where
the interest charge is five and a half per cent an amortization rate of one half
of one per cent is added for the repayment of the debt. That wipes it out
in 69 half yearly payments, or thirty-four and a half years. The general
recommendation that I received from the people who are administering these
banks in the United States was that 35 years was a bit long. I think that they
would on the whole-prefer to see a 20 year amortization scheme instead of a
35 year amortization scheme. That seems to: be the general idea. In regard
to the way in which amortization works out, in certain cases they have had to
foreclose; but I was informed at Springfield and Baltimore that they did not
lose the total loans, that the losses did not exceed $1,000 in these two banks,
due to foreclosure. They had to foreclose in a certain area but they had been
able to sell the lands to cover the indebtedness. I could not get the figures of
the principal foreclosures in the Northwestern States. The bank at St. Paul
which covers Michigan, Wisconsin, Minnesota and North Dakota, was having
a good many foreclosures up to the time I had my discussion with them, but
they did not consider that they were in danger of suffering heavy losses.
By the Chairman:
Q. Are they strict in making foreclosures?—A. They have been fore-
closing. Now, you would think that with this new machinery created people
would have been satisfied that at least there was a comprehensive machinery
for the purpose of carrying on the business of the country; but instead of that
some States of the Union have gone into competition with this Farm Loan
Board; and here, it seems to me, is where we should pause and think carefully
about any plan we may put into operation. In Minnesota apparently the
legislature believed that the Farm Loan Board was too slow in its operations;
that it took too long to get the loan made. They informed me that that was
one of the reasons why the Minnesota legislature authorized a Farm Loan
Board last year based on exactly the same idea and it is now operating a farm
Pr Es VE aonval
BANKING AND COMMERCE ANZ
APPENDIX No. 1
loan system of its own on the same territory and I might almost say across the
street from the Federal Farm Loan Board. Here is a point where we might
have further discussion, the point as to the wisdom of competition in these
schemes. The aim of these organizations has been to get an effective competi-
tion by one piece of machinery that would act effectively in competition with
private corporations, with no desire to put private corporations out of business,
but simply with a desire to so co-relate credit that you will get such security
as trust funds into the mortgage business. Apart from that, any competition,
to my mind, is just wasteful competition. It means that so many more people
are being paid out of the profits that come out of the business.
By Mr. W. F. Maclean:
Q. There must be a number of private companies going out of business
under this competition?—A. With $8,000,000,000 worth of business, and with
the business rapidly increasing—probably in the next ten years it will go up
to $16,000,000,000—there is still room for private corporations to operate.
What has happened is that some of the large companies in the United States
have gone into the amortization scheme; they are now lending money on an
amortization basis. I think I might emphasize once again the points in regard
to the purchase of land at low prices. Take land in Western Canada in the
days of good things. Land bought at $10 an acre could be paid for in two or
three years, but land bought at $75 an acre cannot be paid for in that way.
The whole idea of the amortization scheme is to enable a man to pay his
current obligations from the income of the property. Even that land bought at
$75 an acre can be paid for in three years by amortization. There must be
some relation between the income from the property and the amount a man
can pay. Of course, there is something to be said for the ability of the man
himself. In the Northwestern States—I have not the exact figures, but the
statement was made to me—they have not been forced to sell lands below an
amount sufficient to cover the mortgage charges against the properties.
By Mr. W. F. Maclean:
Q. The amortization is the next great value in this scheme?—A. Amortiza-
tion and regulating the interest; these are the two.
By Mr. Kellner:
Q. What if the land should increase in value?—A. If the farming business
has to be carried on on a basis of increased land values, it is not a business at
all.
Mr. W. F. Mactean: It is speculation.
Wirness: It is speculation wholly.
By Mr. Sales:
Q. You would not say that many farmers have been able to carry on
because of that?—A. I do not think that farming operations are carried on by
that fact; speculation is carried on by a rise in prices. But I do not think it
would affect the ordinary farming operations materially. It would of course
increase a man’s wealth and enable him to purchase machinery—
By Mr. Garland:
Q. And it would enable him to get more credit from the bank to carry on?
—A. Yes. That is the assumption on which the scheme is based. It is based
entirely on the assumption that the debt will be repaid out of the normal pro-
duction of the land; that is, the whole European system is based on that idea.
[Dr Ee Mie forval
218 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Maclean:
Q. And farming is a failure if it is not done?—A. Yes. The rise in land
values makes his credit good, but so far as production is concerned, it does not
help him.
By Mr. Spencer:
Q. And it makes his taxes higher?—A. Exactly, it makes his taxes higher.
That is the mode of approaching the loan system. You would have thought that
that would have been a satisfactory solution of the difficulty, but I would like
to point out one or two reasons why it has not been satisfactory. In my judg-
ment the real reason that the Federal Loan system thas not been entirely
satisfactory in the United States is that a great body of farmers in the North-
western States particularly where the value of property is not sufficiently good
at present are unable to give a 50 per cent basis on which borrowings can be
made. The system is elastic enough to cover the whole country but it is not
elastic enough to cover the man who has no security to offer. That is what is
agitating the people in the United States—
Mr. W. F. Maciean: And in Canada.
Wirness: And in Canada.
By the Chairman:
Q. Is the basis of the value their own valuation or the municipal valuation?
—A. The lands are valued in this way: ‘The first valuation is put upon it by a
valuing committee of the local association. When their value is sent in to the
bank, the bank sends out its own appraiser. That appraiser is paid by the
Federal Government of the United States, and the loan is based on 50 per cent
of the value he puts on the property. Many statements have been made about
the repayment of those obligations. I found this, that generally speaking, there
was a tendency in the beginning for people to overvalue their land. A group
of friends would get together, and naturally they do not like to diminish the value
of their neighbour’s land. That is why an extra appraisal has been found neces-
sary. There was a disposition to feel that this was Government money and there-
fore they would get every advantage out of it. A good deal has been said about
that, but I found this—taking the bank of Springfield—that the way they had
gone about the education work connected with that particular phase of it was that
they tried to sell the bonds all over the country, in the smaller communities,
so the people would see it was money of their neighbours that was being loaned,
and was not the money of the Government, but rather the local machinery that
their friends and neighbours were putting into operation. They saw this very
promptly in the eastern states, and in the western states the same thing took
place. It so happened in some of the northern states, North Dakota for in-
stance, that there had been a disposition to refuse loans to men only engaged
in the growing of wheat. They are willing to lend to men in diversified farming,
but wheat growing has become such an expensive proposition, as shown by the
report of the Commission of the United States, where they claim it costs $1.22
to produce a bushel of wheat in North Dakota, that the loan companies were
refusing to loan to men who are merely growing wheat.
By Mr. McMaster:
Q. Was that not the Commission which said it cost 70 cents to grow wheat
in Canada?—A. They said 62 cents, north of Edmonton. I think that it should
be mentioned as a fact that this is having a considerable effect on the minds
of these loan organizations to-day, that wheat farming has become so expensive
in the United States, due to the falling-off of yields of wheat and to the uncer-
[Dr. .H.+M.oTory.]
BANKING AND COMMERCE 219
APPENDIX No. 14
tainties of the crop, that there is hesitancy in loaning the money to men who
say, “I won’t keep cattle, or I won’t go into diversified farming.”
By Mr. Sales:
Q. Dr. Tory, I presume you have noticed this is all being reported, and
you do not wish to be incorrectly quoted. You do not say yourself that the
figures of 60 cents a bushel is a fair valuation of the growing of wheat in
Canada?—A. No, I simply say the statement was made officially by the United
States Commission who went to Canada and the northern states to collect
information in order that the tariff might be established, and they fixed $1.22
as the cost of raising wheat in North Dakota, and I think they fixed 60 cents
as the cost in Northern Alberta.
Mr. McMaster: 72 cents is my recollection, and they made a comparison
in the cost of production of wheat in the United States and Canada, making
a difference of some 42 cents, and they jacked up their tariff by some 30 or 35
cents a bushel.
Mr. Sates: You had better put yourself straight on that.
The Wirness: I was only quoting.
Mr. Garuanp: In your opinion, is the cost of 60 cents high or low?
The Witness: I think it is very low. That is only my opinion. We
raised a little wheat at the University farm, and I would say that was a very
low figure.
By Mr. Sales:
Q. How much did it cost you there?
Mr. McMaster: I think the witness should decline to answer that ques-
tion under advice of counsel.
Mr. Coots: I will ask a question now, although probably you will prefer
to answer it a little later on.
Q. Can you give this Committee any idea of what percentage of the
farmers in the northwestern states are in the position which you mentioned,
where they have not the necessary security to secure a loan under the Federal
Farm Loan System?—A. I have not the figures that will give me the exact
information, but Secretary Wallace in his report to Congress said that there
were over 100,000 farmers a month leaving the farms of the United States
because they could not carry on farming.
Q. But you cannot give us any approximate idea of the percentage?—A.
No. I have tried to get that information. In the same report Secretary Wallace
said that 15 per cent of the farmers in the western states were bankrupt. If
you will allow me I can get you the exact information on that. I have the
document, and I could get the exact statement on that.
The CuarrMAN: You might say in a general way whether the system has
proved to work effectively.
The Wrrness: I would say that I did not meet a single member of the
Administrative Board of these organizations who did not claim they were
effectively working the machinery in the country. They had regulated the
business, and had opened up channels for the flow of their moneys which would
never have flowed into agriculture at all.
By Mr. Coote:
Q. You would say then, Dr. Tory, that even in the northwestern states
this system has resulted in keeping a number of these farmers on their farms?
—A. I do not think there is any doubt about that at all.
a
[Dr. H. M. Tory.]
220 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Maclean:
Q. And therefore, the whole thing is beneficial?—A. I do not think there
is any doubt about that. I do not know what would have happened if there
had not been such a scheme in operation. May I quote these figures? Under
the Farm Loan System there has been loans, up to the 28th of February, from
St. Paul one of the centres, just over $104,000,000; from Omaha, as a centre,
$97,000,000; from Spokane, $87,000,000; and from Columbia, $78,000,000; and
New Orleans, $74,000,000. I make this general statement here: “Every state
in the Union of Porto Rico have received financial assistance from these
banks in amounts varying from $254,000 for Deleware, to $93,000,000, for
Texas.” I am quoting the individual states. The state receiving the most
money from organzations of this kind has been the state of Texas, $93,000,000.
I might at this point, if it is agreeable, take up the other side of the Farm
Loan Bond Business, the intermediate credit banks, and say a word about
them. The call for better farm loans, what we call intermediate, which is the
term that is used, or short term credits, began in the United States a good
many years ago, and many of the State Banks were organized for the express
purpose of meeting that problem and taking advantage of the financial possi-
bilities of business that was offered by a better system of farm credits. The
whole system that grew up into the Federal Reserve Board worked out along
the line of extending and simplifying credit, with a view to probably better
financing the smaller banks in the country, to make it possible for the smaller
banks to operate better than they were doing at the time. The real difficulty,
as I see it, was the difficulty of the decentralization of the reserves of the
banks, and the impossibility of getting them to flow rapidly to a point where
the money was needed. So the Federal Reserve was brought into being for
the purpose of co-ordinating the banks and their assets into some common
fund which could be distributed as required by localities. At first the ordinary
three months’ loan discount was all that was allowed as an ordinary banking
transaction. That was afterwards extended to six months, but the whole matter
was re-adjusted in 1923. It was considered the Federal Reserve was not meet-
ing the necessary conditions of agriculture, because still its terms of loans were
too short. I am speaking of the ordinary short term credit, and not the mort-
gage credit. The agitation which led up to the establishment of the inter-
mediate credit bank—which I will speak about now—in the United States,
grew out of the belief that the Federal Reserve Board could not be made to
satisfactorily function from the point of view of the farmers’ operations. That
is to say, the terms of loans were still too short. Up until 1923, six months
was the limit; it has now been extended to nine months, and I think, because
the Federal Reserve Board extended it to nine months, in all probability it will
have an effect upon the growth of the intermediate credit banks. In March
1923, the Government of the United States undertook to establish in co-relation
with the Federal Land Bank, intermediate credit banks. They authorized
the establishment of 12 intermediate credit banks at the same points where the
Federal Land Banks were organized, and under the same administration. The
business is kept entirely separate. These 12 banks were organized shortly
after March, 1923. The Federal Government placed at their disposal $5,000,-
000 each; that is to say, they took the authority to capitalize them at $5,000,-
000 each. They arranged that they would have the right of issuing bonds up
to 10 times their capital; in other words, they can ultimately loan up to
$660,000,000—that is, the total group of banks. These were made from the
very beginning mutually supporting, though each did their business separately,
but each is responsible for the debts of the others. The moneys made go into
the Treasury of the United States ultimately, after they have repaid their
[Or. BH. My: Tora
BANKING AND COMMERCE 221
APPENDIX No. 1
original indebtedness. They are allowed to issue bonds for terms not exceed-
ing five years, depending upon the length of time they make their loans. They
are authorized to make their loans up to three years—from six months to three
years; that is the longest term they are allowed to make a loan for.
By Mr. Spencer:
Q. What is the rate of interest, Dr. Tory, which is charged by the Govern-
ment?—A. The same rate as the Land Banks.
By Mr. Hughes:
Q. On mortgages?—A. Yes, up to six per cent. The security is the ordinary
security. Money can be borrowed on farm produce—that is non-perishable
produce—but here again they do not look to individuals. The individual must
get his money from the local bank. This is only a rediscounting agency. A
man must get his money through his ordinary bank, and there again the interest
charge is fixed; it must not exceed one per cent above the rate fixed by the
bank; in other words, not over seven per cent. The bank is allowed six per cent,
and the re-discounting agency is allowed one per cent over that. The details
are worked out in this report.
By Mr. McMaster:
Q. Where the bank charges more than six per cent is not the intermediate
bank allowed to charge more?—-A. If the bank charges more than one-half
per cent above that allowed by law—let me repeat that, a bank can loan money
at six per cent, and the re-discounting agencies cannot loan it at more than
seven per cent. If they loan it at more than seven and a half per cent the whole
debt is cancelled. There is a tremendously rigid law in respect to that, regarding
these particular organizations. They are under governmental control and have
the benefit of government supervision.
By Hon. Mr. Stevens:
Q. It is not obligatory for the bank to loan money?—A. No. May I
repeat that again. There has never been any effort in this scheme to force
anybody to loan money who did not want to loan it. The purpose has been
to simplify and strengthen the credit of the borrowers so that money will flow
normally into these channels.
By Mr. Garland:
Q. Will you repeat again for the purpose of clarifying, the statement you
made with regard to the penalty imposed in regard to the rate of seven and a
half per cent or more being charged?—-A. Might I ask you, in order that there
may be no mistake, to cancel my statement, and let me give it to you once
again in exact form. I see there is a good deal of interest in that. It is printed
in this document and I would not like to quote the details from memory.
Mr. Goon: Is it at the bottom of page xciv and the top of page xev?
The Witness: That is not it, Mr. Good. The penalty is what I want to
get at.
Mr. McBrie: Page xcvii—the middle of page xevii.
The Witness: No, that is in regard to agricultural corporations. That is
not the point.
The CuatrMAN: I think you have it at the top of page xcv.
The Wirness: Yes, that is it. Let me read it, and we will get it straight.
“With regard to the rate of interest charged, definite restrictions
are placed upon it. The maximum rate at which debentures may be
[Dr. H. M. Tory.]
1—27%
222 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
issued is fixed at six per cent, although the Farm Loan Board is given
the power to determine whether it shall be lower than that, while the
bank itself must not charge a rate of discount of more than one per cent
in excess of the last debenture issued. This fixes a maximum of seven
per cent on discounted paper. Im discounting paper for such organiza~
tions as shall be described hereafter, the Federal Intermediate Credit
Bank is not permitted to discount for any borrower who charges a rate
of interest of more than one-half of one per cent above the discount rate
fixed by the Intermediate Credit Bank. The bank is permitted to
purchase in the open market at par, or below, its own debentures before
maturity.”
There is another statement besides that. I will find that and put it in the
records.
Mr. Mituer: Has that any effect in frightening away desirable capital?
The Witness: May I say a word leading up to that? This is based on
a security of $60,000,000, which the Government has put into the banks; they
have been selling at about the same rate of interest as the bonds raised for
mortgage purposes. Whether they will continue to do that if the amount goes
very much beyond the Government’s guarantee is a question that is difficult
to answer. For the moment they have no difficulty in getting all the money
they want. In answer to the question of my friend here (Mr. Hughes) which
he asked a moment ago, I will say that one of the reasons for that is that all
of these bonds are tax-free bonds. I do not find a single man in the United
States who justified the tax-free bonds in the United States.
By Mr. McMaster:
Q. Will you please repeat that again?—A. I did not find a single man in
the United States who justified tax-free bonds in that country on theoretical
grounds, but this is the argument made by many men who are doing a farm
loan business, that as long as all the states and all the cities are allowed to
borrow their money with their bonds tax-free, agriculture should have the same
privilege. That is the position they take, that there is such a wide scheme of
tax-free bonds in the United States that the Farm Loan Board say “We do
not see why we should be deprived of this privilege,” but on the merits of the
case I found nobody who justified it.
By Mr. Maclean:
Q. Is it the tendency here for the rich men to accumulate these bonds?—
A. If privileged, may I answer that without it appearing on the record?
The CHAIRMAN: Yes, certainly.
Mr. McMaster: Human nature is the same on both sides of the line.
(The answer given by the witness to the question of Mr. Maclean was
not reported, by order of the Chairman.)
The Witness: I do not mind being quoted as expressing an opinion, Mr.
Chairman. As a matter of fact I have quoted it in this document, that there
is no doubt the well-to-do are getting the benefit of it, and that is a fact that
is made possible by the rapid sale of these bonds.
By Mr. Hughes:
Q. Are these bonds on the Trustees’ List?—-A. Yes, they are; trust funds
may be put into them.
[Dr. H. M. Tory.]
BANKING AND COMMERCE 223
APPENDIX No. 1
By Mr. Sales:
Q. Did you arrive at any conclusion, Dr. Tory, as to whether that would
be necessary in Canada?—A. The tax-free bonds?
Q. Yes?—A. Conditions in Canada are entirely different.
Q. In order to make money by this course?—A. I have not thought about
it enough to give you an answer to that. I think it would make money flow
into it, without question. They were able to sell in Baltimore $50,000,000, in
two hours, I think it was.
By the Chairman:
Q. Are the issues of these 12 banks made separately or by a central
organization issuing over the 12 districts?—-A. They are made by the central
organizations, but they bear the name of the district for which they are issued.
Q. And do they bear mortgages in that district alone?—A. I cannot answer
that question directly, but I can in another way. The actual mortgages of
all the banks are responsible to each other, but whether as a first call it is only
against mortgages of the locality--I would have to look that up. There is
an indirect responsibility, if not a direct one.
By Hon. Mr. Stevens:
Q. The discounting of this paper by these intermediate banks is contingent
upon the endorsement of the local private banks that offer it for discount?—
A. Yes, it is contingent upon the endorsement, and a first charge. The Federal
Intermediate Banks do not look to the individual for the debt at all; they look
to the bank. But I found this in the northwestern states where the banking
conditions are very bad, that a bank assures itself that the original borrower
is responsible. In other words, while it looks to the smaller bank to pay the
debt, it takes the precaution of being sure that the individual is worth the money.
I have set out on page xcix in diagrammatic form the relations in these Inter-
mediate banks to the other banks of the system and you will see that these
institutions do not deal directly with the individual, but there are three methods
of approach; he may approach through the small bank, or a trust company which
takes responsibility for the loan, or through the National Agricultural Credit
Association, for which authority under the Act is given. These correspond to
the small agricultural banks for the purpose of dealing in agricultural paper.
These banks must have $250,000 capital, fully paid up, before they are allowed
to do business. These are given very, very special authority, but the point
about it all the way through is that apart from the joint-stock banks where
the individual who wants to borrow is permitted to deal with a private
organization, he must deal with his local organization. All the way through
this organization, the machinery does not reach the individual except by this
means.
Q. And the conditions of the loan and the rates of interest are the same as
regards the farmer, whether he goes through the organization or his stock
bank?—A. Yes. That is all arranged. Perhaps, Mr. Chairman, if any one
has a question to put, I could answer it on this general organization, as I take
it it is the American System which you are most interested in.
Moved by Mr. Coote, seconded by Mr. Garland, that the Committee do
adjourn until 8.30 p.m., to-night.
Motion .agreed to.
Witness retired.
Committee adjourned.
[Dr. H. M. Tory.]
224 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
AFTERNOON SESSION
The Select Standing Committee on Banking and Commerce resumed at 8.30
p.m, Mr. Vien, the Chairman presiding.
The Cuairman: Dr. Tory will go on with his statement.
Dr. H. M. Tory recalled.
Wirness: Mr. Chairman, I looked up the items that I was in doubt about
this morning. With regard to the interest charges, I made just one error. If
you turn to page xcix of the report you will see that the farmer operates either
through the small bank, the National Agricultural Credit Association, or a
trust company, some agent. The interest charges of the small bank, that is, the
State banks under this Act, about which we were speaking, would be regulated
by State law. That is to say, nearly all the States have laws regarding interest
charges, and these interest charges would be regulated by the State laws. It
is the interest charged made by the National Agricultural Association to which
I had reference this morning, and you will find a statement about it on page
xevil. I will just read it.
“With regard to interest rates, it must submit to the laws of the
state in which the corporation is located. A special penalty is imposed,
should at any time, or by any means, direct or indirect, a rate of interest
be charged greater than that allowed by the state law. If this is
knowingly done, the corporation forfeits the entire interest of the debt
and has no power of collection and further, the person who was charged
the interest, if paid, has the right to recover in action twice the amount
of the interest thus paid to the corporation, provided legal action is
commenced within two years—a very definite and rigid provision.”
You will find on page ci the other statement that we had some doubt
about. This is my own comment but the figures are taken from the official
report.
“In the meantime, there is a great exodus from the land to the
cities, especially in the above mentioned states. In his report to the
President on the matter, Mr. Henry C. Wallace, Secretary of Agriculture
for the United States, stated that over a million people left the land in
1923. Recently, representatives of a number of the leading farm
organizations in the United States have published an open letter to ‘the
President, the Congress and the people of the United States’, in which
the statement is made that farmers were forced from their homes during
1923 at the rate of 100,000 per month and ‘the process still is under way
in all its cruelty’. ‘Country conditions’, it is said, ‘cannot be told in
words. The hundreds of broken banks are real, but the suffering which
followed them is hidden in the haze of distance. Unceasing toil of
millions of people, futile attempts to protect family and property is lost
without recognition. The reason for all this remains unchecked, although
it has existed for five years.’ ”
By Mr. W. F. Maclean:
Q. These are people, apparently, who cannot be reached?—A. In spite of
what has been done, that is the statement stlil made concerning the people of the
Northwestern States.
Q. But the system will relieve them?—A. A paragraph further up on the
same page will show what steps are being taken.
{Dr. H. M. Tory.]
BANKING AND COMMERCE 225
APPENDIX No. 1
“In spite of all that has been done to provide credit, great distress
still prevails, especially in the western and northwestern states. As none
of the larger organizations under Government auspices are permitted to
deal directly with the individual, an effort is now being made to find a
more direct way to help, especially in assisting those in the grain growing
areas, who wish to develop diversified farming. A bill to grant $50,000,-
000 for this purpose was recently defeated by the Senate of the United
States. The President has appealed to the Chairman of a new financial
organization known as the Agricultural Credit Corporation, capitalized
at $10,000,000, to undertake the responsibility of individual loans,
suggesting that under proper regulations, the War Finance Corporation
would be willing to make substantial advances for the purpose.”
In other words, the way is being sought at the moment in the United
States to reach the people that we have been speaking about that are out of
reach of the ordinary credit facilities based upon business security.
By Mr. W. F. Maclean:
Q. What is the War Finance Corporation?—A. It was created first for the
financing of the war, and in 1921 it was given the task of financing agriculture.
There is a short paragraph on that in this report, on page xcviii, at the bottom.
Q. It is still in existence?—A. It was to have gone out of existence on the
28th February this year, but on account of this difficulty that we are now speak-
ing about, the time has now been extended to the 31st of December.
By Mr. Sales:
Q. Why that sentence “ especially in assisting those in the grain growing
areas who wish to develop diversified farming.”—A. It is specifically mentioned
because of the effort in Congress to pass Acts to help those who wish to develop
diversified farming.
Q. Do you think that would solve the situation?—A. I am coming to what
the United States people are trying to do. They are not lending money to grain
growers only, they are lending to grain growers who are willing to go into diver-
sified farming. They are the only people who are getting money now.
By the Chairman:
Q. Would it be right to say that they object to advancing money unless
guaranteed repayment and that they consider the wheat farmers do not offer
at the present time that security?—A. That is exactly the situation.
By Mr. Sales:
Q. And it is the price of the other products which offer the security ?—A. All
the persons who are making recommendations to the farmer, and these recom-
mendations to the Government are recommending it on that basis.
By Mr. W. F. Maclean:
Q. And they have knowledge of the farming conditions there?—A. Yes.
May I say that Dr. Coulter, the Head of the Agricultural College at North
Dakota, who is probably one of the most competent authorities in America—
I know of no man who is more competent to speak about this subject both
from a point of view of services performed, and from experience—says that
this proposal of $50,000,000 was to be used in an attempt to get the farmers
into diversified farming.
By Mr. Coote:
Q. That was defeated in the Senate?
A. Yes.
(Dr. H. M. Tory.]
226 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Sales:
Q. But take the farming conditions in the country to-day, with eggs at 15
cents or 10 cents a dozen in cases, and butter so low, and the price of beef being
where it is, a man in the cattle business is worse off, or at least as badly off
as the wheat grower, and I doubt whether that really settles the matter—A. You
doubt whether this is the solution? There is no question about their trying
to make it a solution.
By the Chairman:
Q. The point, so far as I can judge, is not as much whether it is sound
or not, but it is actually a fact that in the United States to-day, whether rightly
or wrongly, they consider that the diversified farmer is the only ‘one who can
receive assistance under that system.
‘By Mr. Coote:
Q. Does it necessarily follow that even if this were the proper policy of the
United States the same thing would necessarily apply to Canada?—A. Not
necessarily. ‘
Q. How long have these people being growing wheat in the States of North
Dakota and Minnesota?—A. I should say about 30 or 35 years; many of the
men who are the old farmers in North Dakota are in a perfectly sound posi-
tion in spite of their losses, but during the War people were pushed out into
the northwestern part of North Dakota; there are some people who have not
paid for the first seed grain, after seven years of trial, and whole blocks of the
country are being wiped out, and for such people the best thing, according to
Dr. Coulter, is to get them started, so they can begin to live.
Q. It would be better if they would move off?—A. If they can get something
else to do.
By Mr. Sales:
Q. They were tempted during the War, by the high prices of wheat, to take
up wheat-growing on land which is not suitable for such an industry ?—A. Yes.
In this report, at page cii, I made the following statement:
“Tn reality, there are two causes, one of which is touched upon in the
foregoing quotation, viz., the disorganized state of the world markets,
resulting from the world war and the inability of Europe to feed herself
at the American cost of production. The second cause, however, is found
in the fact that during the war, the high prices of products led to the
purchase of land under conditions which made economical cultivation
impossible in normal times. This was further accentuated by the agricul-
tural development of areas for cereal crops, hitherto unused and wholly
unsuited for the purpose.”
I would respectfully suggest, Mr. Chairman and gentlemen, that there is
a lesson here for us.
By the Chairman:
@. What do you mean when you say, “ The condition under which land was
purchased ”?—A. The price paid and the quality of the land. I am not sure
whether I am quoting this accurately, but as a matter of fact within three or
four months land jumped in the State of Iowa from $150 to $450 and $500 an
acre, almost entirely due to land speculation.
Mr. Goop: Mr. Chairman, it might be of interest to the Committee to
state that last September I had a long talk with Dr. Coulter about this matter.
He had just completed a tour of investigation through the wheat-growing part of
[Dr. H. M. Tory.]
BANKING AND COMMERCE 227
APPENDIX No. 1
the United States, and I formed the opinion that he was well qualified to express
an opinion on this subject.
Witness: There is no question about Dr. Coulter’s qualifications.
By Mr. Coote:
Q. In your investigation of the United States, Doctor, did you find a
tendency among the financial men there to minimize the seriousness of the con-
dition of the farmers in the western states?—A. I did not find any such feeling
in the western states. I was at three bank organizations, one of the large
National Banks, one under the Federal Board management, and also the Head of
this Farm Loan System, and I did not find any disposition to minimize it
by these men. They were wondering what would happen next. Here again I
have a little delicacy in quoting things from the United States which go into
evidence. They gave me information in a friendly way, which I used to formu-
late the documents rather than go into details.
(Whereupon at the direction of the Chairman, the balance of the answers
of the witness was not reported).
By Mr. Sales:
Q. As I have gathered from your remarks, it is the high cost of production
—of everything the farmer must buy—A. I will read you a few lines from the
preceding page, page ci of the report which gives the remedy suggested by some
agricultural organizations in the United States.
“The cause is evident. A disordered world emerging from the war
and handicapped by man-made barriers across channels of international
trade proves unable to absorb the surplus production of our farms and our
industry at prices commensurate with American standards. An elaborate
structure of economic protection is provided for industry and labour but
it does not reach the farmer.
The remedy is as obvious as the cause. It rests in the application
of effective protection of the farm equally with those of other industry.
The establishment of domestic markets for farm crops on an American
basis, apart from world conditions, to conform with like markets already
provided for American manufacture and American labour.”
Mr. Saxes: Go on a little further.
Witness: Yes, this is my comment on it:
“The remedy proposed is that the United States should shut herself
off from trade contact with the outer world. This would appear to be
the remedy of despair. In reality, there are two causes, one of which is
touched upon in the foregoing quotation, viz., the disorganized state of
the world markets, resulting from the world war and the inability of
Europe to feed herself at the American cost of production. The second
cause, however, is found in the fact that during the war, the ‘high price of
products led to the purchase of land under conditions which made econom-
ical cultivation impossible in normal times. This was further accentuated
by the agricultural development of areas for cereal crops, hitherto unused
and wholly unsuited for the purpose.”
Mr. Sates: You do not agree with their remedy?
The Witness: No.
(Dr. H. M. Tory.]
228 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Maclean:
Q. Their new remedy is the legislation—A. I do not think that America can
shut itself off from the markets of the world and still do business with the
world.
By Mr. Sales:
Q. Do you believe it is possible to protect the farmer?—A. Well, I do not
see how the farmer can be protected in a country that exports a considerable
portion of its products.
Q. As exports?—A. Yes. He can be protected within his own market.
Hon. Mr. Stevens: The first thing we know we will be drawn into a dis-
cussion on the tariff.
By the Chairman:
Q. When you say “ The establishment’ of a domestic market for farm pro-
ducts will be on the American basis” it does not mean only protection; it means
the creation of the whole market?—-A. Yes, more than that.
By Mr. Kellner:
Q. You said a moment ago the question of interest was controlled by the
State laws?—A. Yes.
Q. And I understood you this morning to say that the Farm Loan Board
had to control it before they could sell the bonds?—A. That is for the Inter-
mediate Banks. I was speaking there of the corporations and State Banks
through which the farmers secured their loans—that is, the sub-organizations,
you see. You will see that on page xcix. I was referring to the middle group on
that page at the bottom, under the heading “ Intermediate Credit.”
By the Chairman:
Q. The small banks and trust companies?—A. Yes.
By Mr. Sales:
Q. I am interested in Mr. Stevens’ remarks but it is not this Committee
that interjects that, it is very plain there. It says:
“The remedy is as obvious as the cause. It rests in the application
of effective protection of the farm equally with those of other industry.
The establishment of domestic markets for farm crops on an American
basis, apart from world conditions, to conform with like markets already
provided for American manufacture and American labour.”
Hon. Mr. Stevens: I was only suggesting we might have a full-dress
debate on it. If it were to continue, I have a few questions I would like to
ask, 1f possible. :
Mr. Coote: Let us not continue it.
The Witness: May I make myself clear. It says on page ci of this
report:
“Tt rests in the application of effective protection of the farm
equally with those of other industry. The establishment of domestic
markets for farm crops on an American basis, apart from world condi-
tions—.”
That was the thing I was specially emphasizing. The remedy is not to
shut herself out from contact with the world. I was not referring to the
protection end of it at all, and I still hold that view; it is a mere expression of
opinion.
{Dr. H: M. Tory.]
BANKING AND COMMERCE 229
APPENDIX No. 1
By the Chairman:
Q. It had also “to conform with markets already provided for American
mnaufacture and American labour”. Therefore, it assimilates the whole market
for farm products, and the whole products created by the protection of industry?
—A. It practically says we will shut ourselves off from contact with the world.
That would be all right if we did not sell to the world. That has been the chief
ground of agitation against protection of farm products in Washington, that
it would raise the opposition of other countries. I wanted to clear up these two
points that I left unfinished this morning.
Q. You touched on a question in respect to the difficulties met at the
present time with banks loaning money to the farmers and the great anxiety
existing at the present time?—A. Yes.
Q. Does it mean these Farm Loan Banks are in difficulties in respect to
ange loans to farmers?—A. I was speaking there of the small State Banks
only.
Q. Not the Farm Loans Banks?—A. No.
Q. Just the smaller banks?—A. Yes, I was speaking of the smaller banks
of the United States, over 500 of which have gone into liquidation in the
last three or four months.
Q. They could not re-discount with the Credit Banks or the Federal Land
Banks the security which they have to offer?—A. No. This is what happened.
The small banks let out loans on mortgages—the State Banks have the right
to loan on mortgages—on two or three year loans. They were discounting
these with the Federal Reserve Bank, and one or two banks went down and
the people began to withdraw their deposits, and the small banks having all
their money out on capital loans, and receiving no deposits, had nothing to
do business with, and they were going down like ninepins.
By Mr. Shaw:
Q. Is there any relation between any one of these forms of banks, whether
it be Federal Land Banks, or joint-stock banks, or Intermediate Credit Banks,
with the Federal Reserve System?—A. I think I can explain that in one
sentence. The Federal Reserve System received authority to take in as
members of the System all of the National Banks, or in other words the National
Banks were compelled to come in, and the State Banks that came up to a
certain standard in their capitalization, and obeyed certain regulations and
who wished to come in were permitted. Now, all of the National Banks came
in, and about 14 per cent, approximately, of the State Banks joined. The
remaining 86 per cent of the State Banks of the United States have not joined
the Federal Reserve System, and inquiry is going on as to why this has
happened. They have altered the law in 1923 making it easier for them to
get in.
Q. That does not answer the question I asked, Doctor. The question I
wished to inquire into is as to whether any of these Federal Land Banks or
Intermediate Credit Banks which were organized under the auspices of this
Federal Law regarding Land Banks, are related in any way to the Federal
Reserve System, and if so, in what particular?—A. No, these institutions, the
Federal Land Banks or the Intermediate Credit Banks have no affiliation with
the Federal Reserve System.
Q. Are they under the control of the Treasury?—A. They are under the
control of the Farm Land Board, which functions as a bureau of the Treasury,
but they are separate things.
Pre sH Me tory.]
230 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Maclean:
Q. From the standpoint of public welfare would you say that with the
Federal National Reserve Bank System now in operation in the United States
with its rediscounting facilities for member banks in the several Reserve Bank
districts of that country; also with the national legislation creating the Federal
Land Board with its associated Federal Land Banks and Joint Stock Banks
and its Intermediate Land Banks—all these agencies employing national cur-
rency and a substantial and practical credit service at lower and uniform
interest having been supplied by the Congress of the United States to the
whole country, and therefore to the great advantage of the general commerce—
industrial and business—and to agriculture as well—, that similar legislation
would be to the great advantage of business, industry, and agriculture in
Canada?
The Cuatrman: I do not believe that the question is quite fair to the
witness, in the first place, because it is not in the shape of a question it is in
the shape of a statement.
Mr. Mactean: I say if he admits all these things—
The Cuamman: I would rather suggest the question be put to the witness,
and the Doctor be allowed to make his own statement.
By Mr. Maclean:
Q. Well, do you know the Federal Bank Reserve System with its dis-
counting facilities in the districts?—A. Yes.
Q. And that has been the relief of commerce and industry?—A. I would
say that a great advantage of the Federal Reserve in the United States has
been that it has centralized reserves of the member banks which go into the
Federal Reserve System and are held there; it has given, to that extent.
security to those banks by holding, at central organizations, their reserve, and
to the banks who have joined it, it has offered almost an ideal system for
rediscounting and moving the money from one point of the country to the
other, as required. One of the difficulties why it is not meeting with success—
and this is receiving bitter criticism in the United States; as bitter as any-
thing I know of, particularly from the agricultural standpoint—is that, first,
the most of the smaller banks who do business with the farmers have not
joined it at all; they refuse to come up to the business standards which were
advised by the Federal Reserve Board as a basis for the banks coming in,
and so they are not functioning, and the other reason is to centralize the
reserve funds of a nation at a point which can be made available.
Q. And the same thing is attempted in connection with the Land Farm
Board?—-A, With the Intermediate Credit Banks for agriculture.
Q. But on the whole they are trying to settle the financial difficulties of
the whole Union?—A. Mr. Chairman, there is no question—if I may put it
in this way—but that the United States Congress, wisely or unwisely, has made
a gigantic effort—I think it will be one of the greatest adventures in finance
when we see it at a distance in a number of years—to solve the question of
farm credits on a sound basis, but they are finding they have to deal with
human nature just the same, the difficulties are human nature’s difficulties.
By the Chairman:
Q. From what you could judge, was the system successful in the United
States?—A. It was distinctly successful for the people that it reached, people
who had the security. The intermediate banks had loaned in nine months
over thirty million dollars, and to the people who could get that money it was
a successful organization, but the fact was that the farmers up in North Dakota
[Dr. H. M. Tory.]
BANKING AND COMMERCE 231
APPENDIX No. 1
could not get money; they were not loaning a dollar because they had not the
kind of security to offer.
Q. It cannot relieve farmers who have no security to offer?—A. No.
Q. It can relieve farmers who have the security, by providing money at
a cheaper rate of interest—A. Yes.
By Mr. Maclean:
Q. What would you do with the Canadian farmer?—A. I will come to that
later, if you do not mind.
By Mr. Shaw:
Q. Is not the scheme of this undertaking by the United States to have
made available for the farmer his own credit?—A. Yes.
Q. Is that not the underlying purpose of it?—A. Yes; it really starts
out to repeat what was done in Europe, organize the security of the farmer so
that it would become attractive. They do not make a beggar of him; he is
not getting money for nothing, but they are giving better security.
By Mr. Coote:
Q. You have used the terms here several times, “long term credit” and
“short term credit?”—A. Yes.
Q. What term of years would you call “short term” as distinguished from
“long term?’’—A. In the first and second chapter of my report I tried to define
these words, because they are used very vaguely in most literature. Long
term credit is mortgage credit, five years and upwards, and as it is worked out
in all the systems of which we have been speaking, it has been worked out
as mortgage credit on a mortgage bond basis for raising money.
By Hon. Mr. Stevens:
Q. Amortization?—A. Yes, amortization. Europe uses the words “ short
term credit” in every case to cover everything but the mortgage.
By Mr. Coote:
Q. All but the farm mortgage?—-A. Yes. In the United States and Canada
you are using the term “short term credit” to represent ordinary banking
operations, and intermediate loans fom six months to three years.
By the Chairman:
Q. Are they all secured by mortgages as well?—A. In France you may
get a short term credit secured by mortgage, but generally speaking you cannot
secure it by a mortgage at the start.
By Mr. Sales:
Q. That would be a chattel mortgage?—A. Yes, against crop or warehouse
receipts, or anything that is secure, non-perishable. Short term credit as we
use it generally means both short term and intermediate credit. The United
States is the only place where the official term “Intermediate credit” is used
so far as I know.
By Mr. Coote:
Q. It is my opinion that we have never really had a system of long term
credits in Canada, and I want your opinion on that, because I think it is a fact
that the great bulk of our mortgages are given for a term not exceeding five
years. Do you think that is a long enough term for the farmer to be able to
pay it off?—A. I tried this morning to make it clear that where a farm is
bought at the real price of land as it is to-day, no man can pay it off in five
years unless he has other sources of income.
Pere vi sory
232 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Sales:
Q. In fact, you suggested 30 years?—A. Yes. In Britain, for instance,
the whole scheme is on a 60 year basis.
By Mr. Coote:
Q. You would have no hesitation in saying that we do need a longer
term?—A. I say that definitely.
Q. And that we need an amortized loan?—A. Yes.
Q. And that they are not available in Canada to-day—
Mr. McKay: They are in Ontario.
The Witness: They are available only through local Government
organizations, and I believe one or two insurance companies in the United
States are doing that, but they are only available in Canada through the local
Government organizations.
By Mr. Garland:
Q. In every country in which this long term amortization plan of credit
has been carried out, there has been an immediate and general reduction in
interest rates; is that true?—-A. I would not say an immediate reduction; I
would say that as the business has grown in proportion to the total business of
the country, it has certainly brought interest rates down.
Q. But as a result of the establishment of these organizations, there has
been an appreciable reduction in interest?—-A. There has been a regulation of
interest all over the North American continent. I would not like to say
absolutely that, for example, in the eastern States interest rates may not be
much lower. In the western States they are enormously lower.
Q. In your opinion, would the establishment of some similar organization in
Canada reduce the interest’ rates to the farmer borrowers in Canada?—A. Just
as soon as enough money at lower rates of interest is loaned, to be effective.
By Mr. McKay:
Q. Do you think that could equalize interest rates all over Canada or the
United States?—A. I think I see the point you are getting at. Here is what is
happening in the United States. Any big mortgage company going into the
western States finds itself in effective competition with this farm loan scheme.
One hundred and four million dollars loaned out in St. Paul is a pretty effective
competition in that district. Now, what are they doing? They are actually
lending money in some districts cheaper than the Farm Loan Board, but they
are selecting their districts; they are not taking the loans that are difficult.
There is the danger of the situation there as I see it, that the big mortgage
companies will only do business with the thoroughly competent and tried people;
they are selecting the good districts, and they will cut out a whole district
and the Farm Loan Board will have to take the choice of what the company
leaves in that particular district.
By Mr. Maclean:
Q. Are they not trying to pulverize the source of credit so as to make it
common all over?—A. You mean the Farm Loan Board?
Q. Yes.—A. There is no doubt about that; the whole scheme is designed to
give credit all over the country at a common rate of interest, and in order
to do that they are selling common bonds, and the whole thing is a unit. That
is like any company going out covering the whole of the country.
By Mr. Sales:
Q. Do you think the newly settled parts of the country have anything
to do with the success of this business?—A. No, I would be inclined to say
(Dr. H. M. Tory.]
BANKING AND COMMERCE 233
APPENDIX No. 1
this, that the new parts of the country, where credit, the value of land is newly
established, will not get as much benefit from it as the parts that are com-
fortably established. I would be inclined to say that the well-off, strong
farmers will not do business with this organization because they do not want to
go into a co-operative scheme. It is your moderate farmer who will put his
weight into it, and the hope of success of the whole thing is in what we call
the intermediate farmer, the man corresponding to the skilled labourer, as
distinguished from the merchant farmer in the one hand, and the day labourer
on the other.
By Mr. McKay:
Q. You do not hope to devise a scheme that will take in every farmer?—
A. I do not think it is possible to devise a scheme to take in every farmer, unless
you give away money.
Q. I see in the Ontario scheme, 1234 applications were made by farmers
last year, and 953 of ‘them were considered favourably, while 281 were
rejected?—A. Yes.
Q. That is the whole point; there will always be the rejected ones?—
A. Yes, and the rejected ones always make trouble for the others.
By Mr. Ward:
Q. How many provinces have adopted this scheme, or a scheme of this
sort?—A. Starting in the West, British Columbia, Alberta, Saskatchewan, Mani-
toba, Ontario,—Quebec has not, Nova Scotia has, New Brunswick has. The two
left are Prince Edward Island and Quebec.
By Mr. Coote:
Q. Has Alberta loaned any money on long term loans?—A. Alberta has had
an Act on the books since I think 1917. It was never brought into operation.
This year a new Act was passed that is supposed to have been brought into
operation, but it is not in operation yet.
By the Chairman:
Q. Is the legislation in the western provinces pretty similar?—A. Very
much the same.
By Mr. Coote:
Q. You are fairly familiar, I think, with this question of agricultural
credits the world over, and the question of agricultural conditions. Do you
think the Canadian farmer can continue to compete in the markets of the
world if he is compelled to pay from eight per cent to nine per cent interest
on his long term loans e
Mr. Sates: And ten per cent.
By Mr. Coote:
Q. Yes, ten per cent, while farmers in these other countries are getting it
at five per cent and five and a half per cent?—A. I think I say something
in this report about that.
The CuarrMaAN: We are going to the fifth section of this report, which
covers the ground of rural credits in the Dominion of Canada.
The Witness: Might I say just one further word. The other thing I
wanted to call your attention to is this; I emphasized this morning the two
modes of long term credit. That is, the organization of borrowers and what
we might call the organization of lenders, who controlled the rate of interest.
Dx. HM. Tory
234 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
These are the two schemes. Now, there is a third scheme in a great many
countries, and that is the scheme of direct government loans. In Great Britain
the new Act there provides for direct government loans straight from the
Treasury to certain kinds of farmers. For example, their Act was primarily
in the interests of the 21,000 men who bought land between the years 1917
and 1921. In Great Britain there were 21,000 new land holders who purchased
land at that time, and 1600 in Scotland as well. They did that partially on
the promise of the Government that there would be a sustaining of the prices
of products. I think it was in 1919 that Lloyd George made the statement
that there would be a fixed price, and the farmers would be secured if they
continued in their operations, and the result was a great deal of land was
purchased. In 1921 the whole scheme was found to be not feasible, and the
Act authorizing it was repealed, with the result that people found themselves
in a difficult position. Last year, 1922, a committee of the House of Commons
studied the whole subject and they decided there was a just claim on the
part of the men who had been led into the purchase of land by that promise
of the Government, and that therefore some relief must be given to them, so
they passed an Act last year making direct government loans from the Treasury
of Great Britain to the men who bought land between the years 1917 and 1921,
to be repaid on a 60 year amortization scheme, if my memory is correct.
By Mr. Sales:
Q. And the rate of interest, Doctor?—-A. The rate of interest was to be
fixed by the Treasury.
Q. You do not know what it was?—A. I think it was fixed at five per cent.
Hon. Mr. Stevens:
Q. That was to discharge a government obligation?—A. Yes, it was to dis-
charge what a committee of the House of Commons conceived to be a govern-
ment obligation. There were men who had been led to do what they did, who
were in a difficult position as a result.
By Mr. Kellner:
Q. I would like to ask about a paragraph on page xliv, the third para-
graph from the top. It is a suggestion to the committee last year, and I would
like to know if you care to make any comment on it. It is just in this con-
nection, the second paragraph in quotation marks.—A. (Reads):
“Tn this connection also, the attention of your committee was drawn
to the question as to whether it would be advisable and in accordance
with sound economic and banking principles to extend to those pro-
vinces which desired to obtain money for their rural credit systems,
facilities for obtaining of credit such as are afforded to the chartered
banks under the provisions of the Finance Act of 1914, under the pro-
visions of which Dominion notes are issued to the banks against the
deposit of certain approved securities with the Treasury Board.”
Q. Have you any remarks to make about that?—A. May I leave that
until we are discussing Canada? We are coming to that in a moment, and I
wanted to clear up these other points first.
By Mr. Coote:
Q. Just another question about loans in Great Britain. Was that obliga-
tion because of a promise made by the Prime Minister of Great Britain?—A.
Yes; it specifically said so in the report that the Prime Minister made a state-
ment that they would be protected in the a of their products.
[Dr MM. Lory
BANKING AND COMMERCE 235
APPENDIX No, 1
By Mr. Garland:
_ Q. Is it not true that in countries where any such terms were made, there
exists two government systems.—A. I do not think I had started on that when
I was interrupted.
The Cuairman: I would suggest for the time being, gentlemen, that
Doctor Tory be allowed to continue with his statement.
The Witness: In Great Britain I say they have adopted that principle
so far as they are adopting the principle of loans at all. They are also stimu-
lating the local associations which handle the short term credits. Broadly,
that is what they are doing. In all the other British Dominions, South Africa,
New Zealand and Australia, they are making the loans directly from the
Treasury. That is to say, there are Boards organized, but the money is raised
by the Treasury and handed to the Boards. As far as all our organizations in
Canada are concerned, that is in all these provinces the money is raised directly
by the Treasury and handed over to an officer of the Board, so the principle
of loaning money directly from Government funds has been established in the
major British Dominions. It has also been established in all the States of the
Union doing business as States. Minnesota just passed its Farm Loan Act last
year, and in the state of Minnesota, the Treasury is raising the money directly
and giving it to the administrative board to loan. This is state money that is
being loaned in all the States. Altogether, about one hundred million dollars
has been loaned by the States of the Union; there are about 20 of them, I
think, doing that now on the basis of direct state loans.
By Mr. Maclean:
Q. At the one rate of interest?—A. No. The rates of interest vary with the
states; they have to raise the money and pay whatever they can get it for.
The State of South Dakota has approximately forty million dollars on that
basis now. I just wanted to make it clear that there was a group apart from
the other two we were emphasizing this morning, a group of countries financing
it by direct state loans. Now, we come to the position in Canada.
By the Chairman:
Q. If you are leaving this subject, would you tell the committee if you see
any particular advantage in the State raising directly the funds and advancing
them to the Board?—A. The only advantage that I can see is the advantage
of cheaper rates of interest in raising the money. That is, the State can usually
get the money cheaper than any other institution. That is not true where
farm loan schemes are well established, as in Europe, where the money is
raised as cheaply by an independent orgaization whose credit is established.
That is the only advantage. I do not hesitate to say that the outstanding disad-
vantage is the difficulty and danger of a contract of the government and the
individual, coming and borrowing directly from the government funds. There is
no question about the danger of that.
By Mr. Shaw:
Q. Is it not true that in order to get money at a reasonable rate of interest
you have to have a long term loan?—A. Yes.
Q. What would be the effect of our Interest Act, one provision of which
says the borrower can, at the expiration of five years, pay off his mortgage
upon payment of a bonus of three months’ interest? Would that have to be
repealed?—A. No. Under the established farm loan scheme of the United
States, after five years any man can pay back his mortgage if he wants to,
(Dr. H. M. Tory.]
1—28
236 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. McKay:
Q. That is true in Manitoba, is it not?—A. Yes, and the farm loan bank
can go into the market and buy its own bonds with the money to cover it, so
as to be rid of the obligation at the same time.
By Mr. Coote:
Q. I would like to ask one further question about the United States con-
ditions. What percentage of the farmers in the western states would you
think had sufficient security to get a loan under the Federal Farm Loan System?
—A.I could only guess at that.
By the Chairman:
Q. Are there any statistics compiled on that?—-A. No, there are no com-
piled statistics, but the bankers would say 25 per cent could not get loans. I
think the bankers would say that.
By Mr. Spencer:
Q. What could you do with that type of farmer?—A. That is what the
Congress of the United States is labouring to find out to-day. They put up a
fifty million dollar proposition, and the Senate turned it down. The President
appealed to the new Finance Corporation, which has a ten million dollar basis,
and said, “If you will finance these people, we will give you the assistance of
the War Finance Act,” and that is now before Congress in some form.
By Mr. McKay:
Q. In the case of the Governments advancing money in this way to
farmers, say at five or six per cent, what effect would that have on the life
insurance companies?—-A. That is a very big question.
Q. It is a question arising out of this?—A. I imagine that an examination
of the statistics of the insurance companies would show that not more than ten
per cent of the big companies in the East—I will put it this way: I would be
surprised if more than ten per cent of their investments were in farm mortgages.
Q. What about the loan companies?—A. The loan companies would of
course have mortgages out; they would have their mortgages running as long
as they were destined to run.
Q. I suppose that the loans by the loan companies are 80 per cent in
mortgages?—-A. I should say more than that.
Q. Then what effect would that have on the loan companies?—A. The
Saskatchewan Government has loaned $9,000,000 and has authority under
the Act to loan another million dollars on the Farm Loan basis, and that has
not affected the interest rates to any considerable extent.
Q. I am looking into the future?—-A. The fact remains that the mortgage
companies are placing their money at the same rates of interest as they were
placing it before. In other words, there has not been sufficient competition
to affect them.
Q. The reason has been that the local governments have not had the
funds, but suppose they had the funds and they could raise $100,000,000 what
about the loan companies?—A. They would have to come to the same rate of
interest or quit business. If Saskatchewan could lend $100,000,000 they could
take all the business. But may I say that so far as I know, none of these
companies have ever striven to put other companies out of business. What
they have striven to do is to get enough business to be regulatory. The Farm
Loan Board is perfectly satisfied in certain sections not to loan any more;
they do not want to loan any more; they prefer that the companies would
loan. They are always standing there as a competitive organization on the
matter of interest rates.
fr: Ei Me fary-]
BANKING AND COMMERCE 237
APPENDIX No. 1
Q. Are not the fire and life insurance companies lending on farms?—A.
The western life insurance companies, whatever their operations may be, will
give no statistics. I could get no statistics of their mortgage business in Canada
from any of the companies doing business.
By Mr. Sales:
Q. Did they refuse to give you any information?—A. They say there is
no statistical information to give. I tried the Statistical Bureau and they had
no information to give.
By Mr. Coote:
Q. If these life insurance companies were able to invest all their money
in bonds of the Farm Loan Board drawing five per cent interest, without any
expense to them for collecting, do you not think they would be earning a very
good rate of interest on the money they had to invest?—A. I am quite con-
fident that once the security of any new organization was firmly established,
there would be no trouble in selling bonds at five and a half or six per cent,
Whether you could sell at five per cent is another matter.
Q. These life insurance companies have a good deal of money invested
in bonds drawing five per cent interest?—A. I should think that an enormous
amount of money is invested in Government bonds in the United States and in
Canada.
Q. I think that if you would look into some of our life insurance companies
you would find that they have much money invested in farms on which they
have foreclosed.—A. I emphasize in this report—on page exxili—this fact: This
statement was made to me by the mortgage companies that the restric-
tions placed in western Canada on mortgages and priorities has increased the
rate of interest from one to two per cent. That is to say, if those restrictions
were removed, they could do their business at at least one per cent cheaper
than they are doing it now; some said two per cent cheaper. J make the state-
ment here that I did not find anybody who would promise me that if those
restrictions were removed they would start lending at a cheaper rate of interest.
By Mr. Garland:
Q. Is it not true that the Government of those provinces where these
accusations were made have denied that there were such priorities existing?—
A. There is no question that it is a matter of very keen dispute. I say this
that I have not yet found any lender who is willing to pin himself definitely
to an agreement that if the restrictions were removed the price of mortgages
would be reduced. I say this:
“My judgment is, this is a matter of such serious importance that
a conference between representatives of the mortgage organizations of
Canada and the governments responsible for the legal limitations com-
plained of and the lenders of the farmers’ organizations in the country
should be held to discuss the whole matter to see whether some scheme
could not be devised that would remove the suspicion and doubt that have
arisen in connection with it.”
There is no doubt that there is suspicion in the minds of the western people
with regard to the mortgage companies.
By Mr. Sales:
Q. Is it not a fact that before we had these localities brought in, they
charged just as much for our money years ago as they charge now?—A. With
that fact which I have stated before you, you can form your own judgment.
[Dr. H. M. Tory.]
1— 283
238 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Gardiner:
Q. Have you made any inquiries as to the rates which were in existence
prior to this restrictive legislation going into force?—A. I could not find that
there had been a very great variation in interest charges. Now may I Just
say a few words about the Canadian situation. Three times an effort has been
made in the Parliament of Canada to pass an Act, each time with the same
title, to establish in this country on a national basis the principle of co-operation
in the purchase and supply of farm products in small banking organizations.
Each time the bill was defeated. The last time it came before the Canadian
Parliament in 1914, the bill was defeated. No further effort has been made in
that direction recently, to establish anything in the way of a national organiza-
tion for Canada. In the meantime, co-operation has been established, as I have
already stated, in all the provinces. Co-operation for short term loans, and
some plan by means of Government assistance for long term loans has been
adopted in all the provinces, except Quebec and Prince Edward Island. In the
province of Quebec, beginning in 1900, there is a small rural credit bank scheme
of the type established in Germany and Italy. I think it is about as remarkable
a piece of financing, the development of the small rural bank for the assistance
of the rural population, as we have had in this country. It has been developed
without any assistance, even without Government supervision, if my memory
serves me rightly.
The Cuatrman: For a couple of years there have been regulations.
Witness: It has been developed in a very remarkable way. Last year
they did business representing a turn-over of $11,000,000 in small loans to the
farmers and the workmen in the various communities. It is the oldest and best
established system of short term credits that we have in Canada, and it has
been developed without assistance from anybody. The long term credit
organizations of the provinces to-day are practically not functioning. They
have brought a new one into existence in Nova Scotia; it is on the statute books,
but it has not been developed and its machinery has not been set in motion.
The one in Manitoba has been’ working for some time. I think they have
approximately $5,000,000 out; I am trusting to my memory in giving that figure.
They have $9,000,000, out in Saskatchewan, but we have not any out on the
long term scheme in Alberta. In British Columbia there are about $2,000,000
out. They have two Acts there quite varied in their application. I think they
have about $2,000,000 out on the long term basis in British Columbia. Then we
come to the short term credits. In Nova Scotia I think we have about $150,-
000 out under their short term scheme. Manitoba has something like $3,000,000
out. Saskatchewan has not a short term scheme, and Alberta has approximately
$800,000 out, in short term loans through the co-operative associations. They
have a certain amount out, $500,000 or something like that in British Columbia.
That is the situation as it stands in the provinces. As I said before, long
term credits in Canada, so far as the local governments are concerned, apart
from Ontario, are not functioning at the moment because of the difficulties of
getting money. I would like to refer you to the last paragraph of my report,
and then I shall be open to questioning. On page exxi you will find in broad
outline the various schemes in operation, and at the top of page exxiv you will
see my judgment on this matter.
“Further, there is without question, a considerable number of farmers
in Canada, who, following the urgent advice given during the war and at
the close of the war to continue production, find themselves, due to the
heavy deflation, in the same position that farmers found themselves in
England and the United States, and for whom some plan of amortization
POrs He Me tory.]
BANKING AND COMMERCE 239
APPENDIX No. 1
of loans is absolutely necessary, if they are to be able to continue on the
land. This demand is being met to-day only in a very limited degree. It
is very doubtful whether the provinces alone can continue to develop
long term mortgage business without taking risks greater than they should
take in connection with their own financing.
“Now, while I am firmly of the opinion expressed by Sir Horace
Plunkett and already quoted, that agriculture must be a self supporting
industry, I believe with equal confidence that there is a need in Canada
for some organization co-ordinating the credit which the farmer has to
offer in such a way as to make it more attractive to the man who wishes
to loan his money at a reasonable rate of interest with proper security.
Every country in the civilized world has ultimately been compelled to
take such a step. When it is remembered that two per cent, under the
ordinary amortization scheme, will amortize a farm mortgage in 20 years,
therefore, a reduction of two per cent in interest is equivalent in 35
years to the capital debt, the significance of the foregoing statement will
be apparent.”
I have not suggested definitely what the form of organization should be
but I think I have expressed a firm judgment as to the wisdom of something
being done.
By Mr. W. F. Maclean:
Q. You would not say whether it should be Federal?—A. I think I have
strongly hinted that it should be Federal in form if the provinces cannot
finance it. Now, turn to the last page, page exxvi. (Reads):
“One word in conclusion—. It ought to be clear to anybody that
Canada is slowly passing through the stage in her agricultural develop-
ment that the United States was passing through some years ago, viz.,
the best lands of the country have been taken up, wealth accumulating
from the rise in land prices will, in a large measure cease, and land
mortgages based on growing prices will be harder to carry. I have no
doubt that competition from the United States sa far as cereals are con-
cerned will grow less and that, in spite of high tariffs, the United States
must buy from us eventually, but competition from a revived Europe
and other parts of the world will increase. If we desire to have
Canadian agriculture maintain its place in world competition in the
future, the time to begin to plan for the rational administration both
of its finances and its scientific development is the present.”
That is my conclusion, and then I make this suggestion. (Reads):
“Should the Government deem it wise, during the present session
of Parliament to take action with regard to the establishment of a plan
for the development of long term and short term credit, I would
respectfully urge that an intensive study of this problem be continued.
Tf it is considered wiser to wait for further maturity of opinion on the
subject, then I would respectfully suggest that, as the period given for
the preparation of this report has hardly been sufficient to study the
problem from the point of view of the communities seeking benefit, that
I be permitted to continue the study of the problem in the interim.”
Now, gentlemen, may I say just one word in conclusion. My position
in regard to the matter——I have thought it over very carefully—is this: If
there is one thing that we in Canada should avoid, it is the duplication of
machinery. I do not believe that we can start duplicating provincial machinery
[Dr. H. M. Tory.]
240 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
without increasing the cost ultimately of loans to the farmer. In other words,
if you establish expensive machinery, you are going to make business expensive;
and I think they are making a very great blunder in the United States, in
Minesota, in duplicating the Federal system. The thing that was in my mind
when I wrote that statement was this: There should be co-ordination of effort
between the provinces and the Federal Government. Whether it would be
wiser to use the present organized machinery of the local governments, wherever
they desire to use it, and have the Federal Government become responsible in
assisting in the advancement of this scheme—that is one thing. I do not know
how far that is possible, constituted as we are, Anglo-Saxon people, particularly
in the West. But I am firmly convinced that the time to study this thing to a
conclusion is now. Do not let us go too fast, but let us be sure that we get
the right scheme, and if it is necessary to have some help, it should be found
at once. I know that some of you feel very strongly on the matter. My
judgment is that it should be done under some comprehensive arrangement
pending a final organization or permanent scheme; I would certainly be
opposed and would give my judgment against any scheme that would put
the Federal Government in competition with the local governments. It must
be unified, and if the present difficulties could be overcome temporarily to
give us a little more time, I would gladly devote much more hard work to
seeing whether we could not bring together something that would stand the
test of time by doing the right thing. That is my feeling about the matter.
By Mr. Sales:
Q. I would like you to deal with that paragraph which was referred to
on page xliv._-A. In answer to that I would say that I do not think you can
have a short term loan scheme covering Canada without some discounting
agency.
Q. Have you got the paragraph I am referring to? It is on page xliv.
Mr. Kellner raised the question as to whether the provincial governments
should have the same privileges under the Finance Act of 1914 of depositing
their securities, those provinces which desire to obtain money for their rural
credit system?—A. I think I have answered that specifically. If you ask
me the definite question whether discounting facilities should be given by the
Dominion Government to the provinces I am not prepared to give an answer;
but if you ask me whether there should be the same discounting agency that
would be a machinery for rediscounting, I would say yes.
By Mr. Good:
Q. Have you given any consideration to this proposition as an emergency
measure say for the year?—A. No, I have not. What I think might be done is
that some emergency legislation might be passed giving some comprehensive
authority to meet certain difficulties at the moment, taking time to work it out
in detail. I am not saying that I see it as it should come out in the end; I would
like to study the matter further.
Hon. Mr. Stevens: Personally, I have profited very much by the discus-
sion of this matter by Dr. Tory, and I would like to ask whether it is possible
to have a further opportunity of studying with Dr. Tory this question. There
are some rather important questions that I would like to ask him, and as it is
now getting late I would not care to discuss them in a casual way.
By Mr. Maclean:
Q. When do you expect an answer from the Government in regard to this
report?—A. I am not expecting an answer from the Government at all. The
[Dr. H. M. Tory.]
BANKING AND COMMERCE 241
APPENDIX No. 1
Government asked me to prepare a report, and I have prepared it. They can
accept it as an interim report, if they desire so to do.
By Mr. Irvine:
Q. I would like to ask if you cannot make your recommendation a little
more definite than you have. I quite appreciate the necessity of co-ordinating
all the various agencies that are attempting to give long-term credits, but
could you not be a little more definite as to the means of co-ordinating those?
—A. If I were told that that had to be done, I have no doubt I could put myself
at work upon it and think it out to a finish, but personally I would prefer
before suggesting a final plan to study all the localities a little more than I was
able to do in the short time I had to work it out.
By Mr. Maclean:
Q. Have you authority to do that now?—A. No. They can ask me if they
desire.
Mr. Sates: On page xliii there is a report of the Special Committee of last
year, setting out in the second paragraph:—
“As to the necessity of credit on more advantageous terms to the
farmers of this country, there can be little room for difference of opinion.
Well selected and secured from loans should be among the safest and most
attractive of invesments, while the security offered through the pledging
of non-perishable and readily marketable farm products is certainly
comparable to that offered by merchants and manufacturers. Notwith-
standing these facts, the agriculturist of Canada, in certain parts at least,
pays considerably more for long term credits secured by his property than
many of his competitors in other lands as well as more than is paid by
many of his fellow citizens in other walks of life for similar accommoda-
tion.”
Do you agree that the agriculturist pays considerably more for his’ lon-
‘term credits secured by his property, than many of his competitors, as well as
more than is paid by many of his fellow citizens?
The Wirness: I agree thoroughly that he is paying more than any of his
competitors. I say there is no question but that he is paying more interest than
his competitors; whether he is paying more than his competitors in ordinary
business houses I would not care to say. I think possibly not much more,
although the business charges in western Canada are about the same, eight or
nine per cent all around. I have borrowed a little money occasionally, myself,
when I was hard up, and I have never found anything in Alberta less than eight
per cent.
By Mr. Shaw:
Q. And that is compounded every three months?—A. Yes.
By Mr. Coote:
Q. Would you care to answer that question of mine now?—A. I would be
glad to answer any question I can.
Q. What are the chances of the Canadian farmer competing in the markets
of the world against the farmers of these other countries which have a rate of
interest so much lower than the Canadian farmers have at the present time?—
A. I believe that the difference of two per cent in the rate of interest may mean
all the difference between success and failure under competitive conditions, and
as we settle into our groove in western Canada with more or less high-priced
land, we will feel the competition of six per cent as against eight per cent, without
question.
[Dr. H. M. Tory.]
242 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Shaw:
Q. I would like to know something about your idea of emergency legislation
—how should it be undertaken? Supposing we could not form a definite plan?
—A. If you propose to meet on Friday at four o’clock to discuss this matter with
me, I would like to think it over between now and Friday. I think that that is
a very big question.
Mr. Goon: I think Dr. Tory, if you will undertake to put your mind on
this problem and suggest something on Friday, it would be very valuable to us.
By Mr. Coote:
Q. I would like to ask if you think it is desirable that this lower interest
rate could be made favourable to our farmers as soon as possible?—A. Without
question.
Q. Do you think it is possible to do so without undue risk?—A. I would
be inclined to make this answer, although it is not a final answer; that it is not
possible to do it without farmers’ organizations backing it themselves. I believe
firmly in the organization of the farmers themselves, if for nothing else than
for educational purposes, backing their own credit. In every country in the
world that had been the basis of compounding or co-ordinating the credit of
the group behind the individual, and giving security to remove doubt as to
security, and if you do that, the interest charges will come down as automatic-
ally as clockwork.
Q. If you had a credit organization similar to those in the United States,
which borrow from the Federal Farm Loan Board, would we then be in a
position to loan money to a certain percentage of our farmers without undue
risk?—A. If you can raise the money on mortgage bonds at five per cent,
you can afford to lend it at six or six and one-half per cent. One and one-half
per cent will carry all the charges. :
Q. I would like your opinion, if you can give it, as to whether a certain
percentage of our western farmers are in a position where it would be safe
to loan them this money ?—A. I think there is no doubt about that.
Q. You think they have sufficient security?—A. I certainly do.
By the Chairman:
Q. You have no idea of what percentage it would be safe to loan money
to?—A. No. Mr. Chairman, I have not.
Q. May I draw attention to Prof. Swanson’s statement last year?—
A. Yes, I have read it, but I do not recall it now.
Q. Would you read it again, and particularly at pages 787 and 788 of last
year’s report, and tell us at the next meeting what you think of it?A. Yes,
I will be glad to.
By Mr. Coote:
Q. I think you said something, Doctor, about there being a danger of
going too fast in initiating some legislation in Canada?—A. Yes.
~Q. Which do you consider would be the greatest danger, going too fast
or going too slow?—A. The significance of my remarks about going too fast
really was this; I said in this report that the time to prepare for a proper
financial and scientific administration of agriculture is now. I mean we should
take time now to do as well as we can—or if I might use the expression, as right
as we can do it.
By Mr. Ward:
Q. That would not prevent emergency legislation?—A. No. We are doing
things not so much for the present as for the future, probably for 100 years,
{Dr. H. M. Tory.]
BANKING AND COMMERCE 243
APPENDIX No. 1
and if we can get the thing started right and going right we might be doing
the biggest thing for agriculture ever done in Canada. I think it is unwise to
force men to think faster than they can think about some of these things.
By Mr. Spencer:
Q. Would you recommend emergency legislation?—A. There again I think
it is a policy for you men in Parliament to say that. I have never gone into
the farming districts yet to see, but you know how hard the situation is. I
imagine that some legislation, for example, that would assist the western
governments with money which they themselves would become responsible for,
to help their machinery and keep it going for the time being is all that is
necessary.
By Mr. Steadman:
Q. You are familiar, of course, with the provincial systems, for instance,
the Manitoba Farm Loan Board?—A. Yes.
Q. There is no one needs more assistance than they; now. Would you
suggest that it would be advisable that the Government of the province of
Manitoba should assist them to secure money to come to the relief of the
farmers at once, this year; we cannot wait; we cannot wait for a perfected
system? Would you consider it a safe system to work on to finance the
farmers under that system?—A. I think that the Manitoba system as presently
working is safe enough; it did not show a great saving.
By Mr. McKay:
Q. Might not that be due to war conditions?—A. It is due to other con-
ditions which we are not discussing here. I think the Manitoba system is a
perfectly safe system, and I think the Alberta system is likewise a perfectly
safe and sound system.
By Mr. Gardiner:
Q. Do you think it would be possible to sell bonds in Canada at the rate
of discount prevailing in the United States?—A. No, but I feel confident that
with a perfectly organized piece of machinery we could sell bonds in the United
States. One of the bank managers of the Farm Loan Board said there was no
difficulty in getting money in the eastern states of the United States, if you
are properly protected.
By the Chairman:
Q. Would he be in the same position easily to sell his bonds if they were
not tax exempt?—A. No, he would have to pay one-half of one per cent more.
The Americans are selling bonds at 44 per cent for their schemes, and you would
have to pay one-half per cent more than that, and whatever the difference was
between the currency of Canada, and the United States, as well.
By Mr. Steedsman:
Q. What percentage would you consider necessary for the Government
scheme to carry the interest rate equal with the interest charged by the other
corporations?—A. In the United States the Farm Loan Board mortgages are
all based upon 50 per cent valuation on the property. That is to say, they
will not loan more than 50 per cent on the property.
Q. And what percentage of the amount loaned to the farmers would it be
necessary for the Farm Loan Board to pay to influence the rate of interest in
the other countries, because the great thing is the reduction of the rate of interest.
We do not care who holds the mortgages, so long as we get an amortized plan.—
(Dr. H. M. Tory.]
244 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
A. I told you this morning that in Germany 14 per cent of the loans have
been made by these organizations, and they practically control the rate of
interest on mortgages. In France, the Credit Foncier has a monopoly on the
mortgage business, with a fixed rate of interest. Nobody else does business with
the farmers excepting the Gredit Foncier. In the United States they have
loaned approximately 16 per cent of the total—that is, 16 per cent is in the
hands of the Farm Loan Board. There is no doubt that in certain localities it
is decidely affecting the interest to-day.
By Mr. Good:
Q. Would you say 20 or 30 per cent would be effective?—A. I would say
20 per cent would be effective, but you have to face this fact, and you might
as well face all of the facts, that the competitors you will meet in the shape
of loan companies will take this business into the best areas of the country and
leave the other areas to the Farm Loan Board.
By Mr. Spencer:
Q. Have the mortgage companies already gone on record against the
starting of rural credit?—A. I have no doubt they would object, because they
are against it everywhere.
By Mr. Coote:
Q. How many years behind the United States do you think we are in
Canada now, as regards the question of long-term credits?—A. Just since 1916.
Q. And you can not wonder then that some of our farmers in the west
are a little bit discouraged at the interest which this Government shows in their
behalf?—A. That is a political question I would not want to answer.
Q. I did not intend it in a political sense at all. Perhaps I should not
have said “this Government”, I should have said the Parliament at Ottawa?—A.
I think it is remarkable that the Parliament at Ottawa has not passed an
act long since, a national act, for co-operation; I could never see why that was
defeated in 1914.
Mr. Goon: I have made some investigation into that this session.
By the Chairman:
Q. What is the question?
By Mr. Coote:
Q. Do you not think that there is a very great danger to our farming in-
dustry from waiting too long to introduce something in the nature of long term
rural credits?—A. I am absolutely confident we have to come to the scheme of
long term rural credits if we are going to stand in competition with the world.
I am certain of that. You could answer the question better than I can be-
cause you know the country better than I do, whether it is a pressing need or
not. I have no doubt that a great many people will immediately receive
the benefit of long term credits, but whether they can wait six months or a
year, I do not know.
Q. Would it be much easier to introduce the proper machinery for long
term credits than for short term credits?—A. I think the money is more easily
obtained, yes.
Q. And that is the place to begin, if a start is to be made?—A. In Doctor
MacGibbon’s report, he reported that the farmers were not so anxious about
the long term credits as about the short terms. That was in 1923. His state-
ment was that the mortgage business was not as pressing as the short term
business, that this three months banking problem was a serious difficulty.
(Or: ASM: Tory.)
BANKING AND COMMERCE 245
APPENDIX No. 1
Q. I quite admit that.—A. But you are asking me to make a comparison,
to compare two things, and all I can do is speak on the evidence that has been
submitted to me.
Q. Just on the question of the possibility of such a scheme, are you not
convinced that a long term credit scheme is much easier to introduce?—A. If
it is really a question of the Dominion government starting it, the whole
scheme of long term credits could be established in two months, but the dif-
ficulty is to re-adjust ourselves, to co-ordinate all the other systems as well.
I do not see any legal or financial difficulties about a system of long term
credits. Without claiming to have any legal knowledge, I venture to say that
I could assist in drafting a bill in three days to cover it, but it will not solve
the problem of co-ordinating all these efforts.
By Mr. Spencer:
Q. Could that not be done afterwards?—A. I do not know. I would like
to have a conference on that.
By the Chairman:
Q. I would like to ask the doctor if he does not think that the great
justification for the delay by Parliament in introducing that legislation was the
fact that it was left to the initiative of the provinces, and that seven provinces
out of nine have taken the initiative, and quite properly so?—A. Yes. The
three western provinces sent delegations with the American Commission in
1913. J went for our own province, and Saskatchewan, as the result of their
investigations in Europe—they went with the Commission, but as an inde-
pendent body—formed a farm loan scheme which has been in existence since,
I think, 1915, and they have been lending up to nine million dollars. The
initiative was taken by the provinces in this whole matter; there was no
representative of the Dominion Government with that commission.
By Mr. Coote:
Q. I wish to assure you and the committee that I had no intention of
injecting anything at all political into this committee by the question I asked
Doctor Tory. It was simply to bring before the committee and Doctor Tory
the fact that the people of Canada had made no effort to deal with the question
of rural credits, although the United States dealt with it seven years ago.
The Cuatrman: But even at that, I thought the remark was not quite
fair in this respect, not that it was a reflection on any political party, and
that there was no political question in it, but I thought it was not absolutely
exact to say that the people of Canada had not taken any initiative in respect
of that. I think it would be fairer to establish that the initiative was left to
the provinces and that seven provinces out of nine have already taken steps
to relieve the situation, and have relieved it to the best of their ability. That
the time has now come for the Federal Parliament further to study the ques-
tion and to take whatever method the committee might suggest, is quite prob-
able, and the witness has said so, but I do not believe that any reflection should
be cast upon any political party, or upon Parliament itself for not having
taken such initiative which has been left to the provinces thus far.
Mr. SuHaw: It would not be high treason to do so, though.
The CuHatrMAN: No, I do not say that, and therefore I did not rule the
statement out of order, but I thought I would correct the statement by putting
the question to the witness, and he has answered it.
By the Chairman:
Q. Now, I have another question that should be put to the witness, and
which might throw some light on the subject on that very point. Is it not a
[Dr. H. M. Tory.]
246 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
fact, Doctor, that any scheme of rural credits established either by the Federal
or Provincial initiative will be unable to cope with the demands that are
coming from a considerable proportion of the prospective borrowers, who can-
not offer the necessary security for their loans?—A. Without question.
Q. Therefore, that much of the uneasiness and much of the suffering that
exists in the three prairie provinces and elsewhere in Canada—because I think
it is wrong to say that the farming class in the three prairie provinces alone
suffers; there is suffering in every province as well, in the province of Quebec,
in the province of Ontario, the farming classes have felt the same difficulties.
That is to say, they have suffered from the contraction of prices, the prices of
the commodities they sell, when they have to pay almost the same prices for
the commodities they buy that prevailed during the war. Is it not a fact that
any system will be unable to cope with the demands, particularly on account
of the fact that a prospective borrower cannot in many cases offer the neces-
sary security?—-A. The answer to that is that of the 1,500 who made application
to the province of Ontario—you had the figures a moment ago—900 odd of
them were all that could get loans, and I think the figures in Saskatchewan
will show that about two-thirds of the people who applied for loans there got
them, and the others were refused.
By Mr. Garland:
Q. Those two-thirds certainly needed it—A. Without doubt.
The CHairRMAN: Have you another question, Mr. Coote?
Mr. Coots: I have a statement I would like to make in reply to your
statement.
The CHatrMan: Go ahead and make it.
Mr. Coors: My statement is this, that I think the statement which you have
made regarding the condition of the farmers in all the provinces of Canada
justifies the statement which I made regarding the neglect of this Parliament
to pass legislation years ago to keep pace with the United States. The control
of the finances of Canada rests with the Dominion, not with the provinces, and
it was because of the neglect of the Dominion to make suitable provision for
rural credits that the provinces did take some steps to try and initiate a system
of rural credits, and I will wind up with this question to Doctor Tory.
Q. Is it not a fact that the province of Alberta, although they put legislation
on their statute books as a result of the reports made by you and your associates,
upon your return from Europe, but owing to the fact that the province of Alberta
has not the necessary funds, they have not been able to make any long term
loans, to any of the farmers in Alberta?—A. There are others in the room better
able to answer that question than I am. As a matter of fact, the Government
of Alberta did not make loans on the basis of the Act which they passed. They
have not yet made any loans under that Act. Whether it was wholly due to the
inability to get money, or whether there were other causes, I am not absolutely
prepared to say. I think the difficulty of getting money is one of the great diffi-
culties, but I am inclined to think there are other causes of anxiety as well.
Q. May I ask one further question. If the Federal government in the United
States had left it to the governments of the several states to take care of the
problem of rural credits, do you think the rural credit problem of the United
States would be in as good shape today as it is?—A. No, I agree with you
absolutely; there is no question about that. The Federal government scheme
was so comprehensive that it is rather curious that the local governments are
now competing with it.
Q. There is one more question I would like to ask. If, in the United States,
they had waited until they were able to get all their schemes co-ordinated, and
get every state lined up with a Federal scheme, it is possible that it would have
[Or He eM: Dory]
BANKING AND COMMERCE 247
APPENDIX No, 1
taken them several years to initiate that legislation —A. Yes, but of course my
answer to that is this, that the question implies a criticism of my previous
judgment, so my answer is this, that America is a country of one hundred and
ten million people; that the state of New York alone has more people than the
whole of the Dominion of Canada—
By the Chairman:
Q. And more money?—A. Yes, and we have a very scattered population.
If the United States were starting with a population of nine millions, I do not
think it would have been started with state organizations at all. That is why
I say we have no room for competing organizations. We shall defeat the very
end we started out to bring to pass if we have competing organizations cutting
each other’s throat and bringing politics into the administration, because that
is what will happen. I would organize the thing from the beginning now and
get it going right, but in the meantime if—what was the word, “emergency” ?—
legislation is deemed necessary, I think we could quite easily find a way by
which it could be made effective.
By Mr. Coote:
Q. If we wait another year before we make even a start?—A. I am not even
suggesting that we wait another year.
Q. In the other provinces which are not yet loaning anything on long term
credits, would there not be a great deal of pressure brought to bear to get
their schemes in operation, and then we would find two others to be co-ordinated?
—A. I think we should take it up at once, of course. Do not let anything I
have said convey the impression that I am asking for delay. I would like to
see something done worth while; I have aimed at that all the way through, to
get information upon which to base a worth while scheme, and if emergency
legislation is necessary, let us have it.
By Mr. McKay:
Q. There must be a complete co-ordination of all the provinces in the
scheme, doing away with all the local organizations we have at the present time?
—A. Or using them as the basis for some further organization.
Q. But the scheme must be nation-wide?—-A. Yes, that is the only way you
could ever hope to establish a common rate of interest.
Q. We are to have next summer a national meeting on taxation, something
that has been discussed for several years. Would it not be well to work this in
and have a national discussion on this as well?
Mr. SHaw: Discussion will not help the farmers.
By Mr. Ward:
Q. You made the statement this morning, Doctor, when you were referring
to the Federal Loan Banks, that the borrowers were loaning money to themselves.
—A. No, I did not say that. I said the borrowers were capitalizing their own
loans, which is a slightly different thing. What I meant is this, that these loan
Banks are permitted to loan twenty times as much as their capital, so if a farmer
subscribes for $50 worth of stock, on the basis of that he can borrow $1,000,
so he capitalizes his own loan, in reality.
Q. That is to say, they are utilizing the wealth of the community for its
own development?—A. Yes, to that extent, that is true.
Q. Would you see any objection to that being carried out in the wider sphere
of the development of a nation, Canada if you like? Canada might utilize her own
wealth for her own development, rather than floating bonds in a foreign country?
—A. Absolutely, if she can do it. It is a question as to how far that can be
done.
(Dr. H. M. Tory.]
248 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Maclean:
Q. Would it not be a great relief to the banks in Canada if the kind of
banks we are talking of were established? They ought to assist in it —A. I could
not say; the banks would have to speak for themselves. I do not know enough
about banking business to know whether it would affect them or not.
By Mr. Shaw:
Q. In your proposed scheme for emergency legislation, when you are
considering that I would like to have in your mind a proposal that has been
made. I do not know that it meets with the approval of the entire committee,
but it is a proposition for the organization of what is called a central bank, which
would have powers of rediscount, and I would like you to have in mind the
establishment of an institution of that character, under government control,
of course.
By Mr. Good:
Q. I was going to suggest that perhaps one reason why the Parliament of
Canada and the people generally have not given consideration to this in the
past, has been that we had not felt the need acutely until the deflation came
in 1920 and 1921, and I was going to ask Doctor Tory whether or not he had
made any particular study of the effects of that deflation as it concerns agri-
culture in relation to the increased need for the development of rural credit
systems.—A. I have made a little study of it; I think I have studied it enough
to be able to say that the deflation in prices is very largely the cause of all our
present difficulties. I would say there were the two things, deflation and the
loss of markets. The loss of European markets has played a part in it.
By Mr. Coote:
Q. Are we not sending more produce to the European markets than we
did before?—A. I do not know how we are in Canada; I have not checked the
figures on that.
By Mr. Good:
Q. Just in that connection, Mr. McMaster made some investigation last
year. He is not here to speak for himself, but the general result of his investi-
gation was that the amount of agricultural exports to Europe was considerably
in excess of what it was in pre-war days, and that the prices were generally
better. You mentioned the loss of our markets. The Deflation did not come
until two years after the war, so there is something to explain in the con-
tinuance of high prices from 1918 to 1920.—A. The difficulty I see in giving
the explanation—I would say these are principally the facts of the case. At
first, when war was over and even as late as 1919, the Prime Minister of
Great Britain was so confident that the prices were going to remain, that he
promised the farmers of England to fix them by law. He did not foresee what
would happen. Europe was out of food, and bought largely immediately
following the war. There was an immediate purchase of a great deal of material
directly following the war. We were told prices would continue for at least
five years; I was told that by men who seemed to be ‘competent authorities,
and even after the war was over we were told to keep on working, because
nobody foresaw the fall that took place, once the immediate needs of Europe
were supplied, and they were supplied by 1920.
Q. There are some who contend that the deflation was brought about deliber-
ately. It was suggested here the other day by Mr. Williams, former comptroller
of the currency of the United States, that it was the financial policy inaugurated
in 1920 that brought about that sudden deflation, and I think Mr. McKenna
{[Dr. H. M. Tory.]
BANKING AND COMMERCE 249
APPENDIX No. 1
in England has stated the same thing. I was wondering if you had heard
of that?—A. Yes, I have heard both sides of the question advanced. If you
take the report of the Federal Reserve Bank of Minneapolis, published in March
1923, you will see that they present a full statement of their case against the
view that they were responsible. They say that they continued to loan money
lavishly to agriculture, that the thing was world-wide and they could not control
it. I think that is a question upon which men will always dispute. We may
arrive at a solution one hundred years from now, but not short of that.
By Mr. Maclean:
Q. Would you like to see low prices come for agricultural products?
Mr. Spencer: Have we not got them now?
By Mr. Maclean:
Q. Would that help the situation, if the prices got lower?
The CuHarrman: Gentlemen, I suppose we might adjourn now until Friday
at 10 o’clock, and on Friday afternoon at 4 o’clock we shall sit again to con-
tinue Doctor Tory’s evidence.
Witness retired.
The committee adjourned
CommiTTEE Room No. 429,
Howusk or Commons,
Fripay, May 30, 1924.
The Select Standing Committee on Banking and Commerce met at 10 o’clock
a.m., the Chairman, Mr. Vien, presiding.
C. E. Netix called and sworn.
The Cuatrman: I would suggest to the Committee that we adopt the rule
of procedure that we have followed during the hearing of previous witnesses,
allow Mr. Neill to make his statement, if he has any to make, and then question
him. Mr. Neill, would you kindly give to the Committee your financial capacity,
your occupation and experience for the information of the Committee?
Witness: In the absence of Sir John Aird, who is in England, and is the
President of the Bankers’ Association, I, as Vice-President represent the Asso-
ciation. My position, as probably you know, is that of general manager of the
Royal Bank of Canada. Perhaps it might be advisable for me to say at the
outset that I have not had the opportunity of consulting the bankers generally
as to what I am going to say. While I represent the Association, the views I
express here are my own views.
By Mr. W. F. Maclean:
Q. Not the views of the Association?—A. No. I have no statement to make;
I would prefer that the members of the Committee would ask me any questions
that they desire to ask.
By the Chairman: A
Q. Mr. Neill, we have been examining under the order-of-reference to this
Committee, the conditions created in respect to depositors by the failure of the
Home Bank. The reference asks us to consider the provisions of the Bank Act
(Dr. H. M. Tory:]
250 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
with a view to recommending such amendments to the Act as will better protect
the interests of depositors generally, and prevent similar occurrences in the
future. The suggestion was made to the Committee that the Government should
create a system of bank inspection or bank examination, separate and distinct
from the bank audit actually in force, under Government control] by officers
appointed by the Crown. We would like to have your views as to how the
amendments made to the Bank Act last year now function, and what your views
are as to the creation of a Government inspection bureau separate and distinct
from the audit actually in foree——A. I can best give my views by reading what
I stated at the last annual meeting of our shareholders. It was this:—
“In some quarters there is a demand for Government inspection.
Speaking for this bank, I desire to say that while we have a highly
developed system of internal inspection, and in addition a thorough audit
by efficient and experienced public auditors appointed by the share-
holders, we shall be only too glad to submit to any further reasonable
form of audit or inspection required, be it Government or otherwise, pro-
vided such inspection be efficient.”
That is the one thing we demand, efficient inspection.
By Mr. W. F. Maclean:
Q. Your Association has not made any declaration along the lines of that
statement?—A. Our Association has not, but I think I am safe in saying that
perhaps a majority of the Canadian bankers have expressed themselves in this
way. Several have not, but on the other hand, I think the majority have.
By Mr. Euler:
Q. They have not taken any action as an Association?—A. No.
By Mr. Good:
Q. What was the attitude of the Bankers’ Association last’ year when this
question was before the Committee, if you know and can answer?—A. That
would appear on the record of the meetings last year, Mr. Good. I do not know.
Q. The proposal was made last year and voted down, and I want to know
what the attitude of the Canadian Bankers was last year in regard to this pro-
posal to which they have now given their qualified assent?—A. I do not know,
Mr. Good, that the Canadian Bankers, as a whole, came to any conclusion. I
think, if I remember correctly, that certain bankers expressed themselves as
being unfavourable to Government inspection; whether or not any expressed
themselves as being favourable, I do not know.
Q. In your knowledge, has there been any change of attitude on the part
of leading Canadian bankers on this question since last year?—A. Perhaps
there is. As a matter of fact, while bankers may not consider Government
inspection a necessity, at the same time, bankers feel that if the public demand
Government inspection there is no reason why the public should not have it,
so long as it is efficient.
Q. Might it be the means of restoring confidence?—A. That is possible.
Q. With regard to Section 56 (a) which gives the Minister the power to
make any special examination at any time, what was your judgment last year
towards that section, which I believe Mr. Fielding claimed to be sufficient?
—A. You mean my personal attitude?
Q. Yes.—A. I saw no objection to it.
Q. Did you at that time consider it to be effective?—A. If I considered
it at all, I would say so, yes. :
Q. Do you consider it to be effective now?—A. You mean, if the Finance
Minister— if. See
[Mr. C. E. Neill.] eas
BANKING AND COMMERCE 251
APPENDIX No. 1
Q. Iwill read the section if you wish. (Reads).
“The Minister may direct and require any auditor appointed under
the next preceding section of the Act, or any other auditor whom he may
select, to examine and inquire specially into any of the affairs or busi-
ness of the bank.”
And so on. It is the provision which enables the Minister to make a special
examination of the affairs of any particular bank.
Mr. SHaw: That was passed in 1913.
By Mr. Good:
Q. Yes, it is not a new section, but the claim was made last year that it
was sufficient; and I want to know what your attitude was last year and what
it is this year in respect to that particular provision—A. My attitude this
year is this: If this Committee does not think that that is sufficient, I would
be prepared to go a step further and satisfy the Committee.
Q. Do you consider that it can be reasonably effective in any case? Per-
haps you do not understand my point, but if you have been reading the
reports of the Home Bank investigation and the reports of this Committee,
you will have seen that a number of people, including the present Act-
ing Minister of Finance, and Sir Thomas White and a number of
others, have expressed the view that, unless under very severe pres-
sure, no Minister would undertake a special examination of a bank because
of the suspicion which it would throw upon that particular bank; that, there-
fore, in view of his reluctance to throw suspicion upon any institution which
might be entirely solvent, he would not make a special examination. I think
that was the case when the affairs of the Home Bank were brought to the
attention of-Sir Thomas White a few years ago. The question I now raise is,
whether or not under the circumstances that section was effective or operative
or whether it could be expected to be operative?—-A. I can see no reason why it
cannot be made effective. I can see no reason why the Minister could not send
an officer to a bank at any time, if he thinks it advisable to do so.
Q. You do not think that such action on the part of the Minister would
cast suspicion upon any bank specially selected for examination?—A. It might;
I cannot*say it would not. It might, but that would be for the Minister to
decide under the circumstances what the best course would be to pursue.
Q. Suppose, as General Manager of the Royal Bank, that the Minister
should suddenly send an auditor or staff into your Bank to make a special
examination, it would be difficult possibly to keep that from becoming public;
would you make any protest against such an action?—A. We would not like
it, but we would expect that the Minister would not do that unless there was
good cause, and if there was good cause, we should not object.
Q. How would you know what was sufficient cause until he had made the
examinatiqn?—A. Information that might be conveyed to him.
Q. By who A. Any one at all whom he considered reliable.
‘ayes understand then, Mr. Neill, that you hesitate somewhat to endorse
the statement made by Mr. Robb and by Sir Thomas White and a number
of others with regard to the ineffectiveness of that section. I do not wish
to prolong the discussion on this, but you are not prepared to endorse what they
have said?—A. I do not know ‘exactly what they have said.
Q. I have not the records with me, but—A. They thought that that sec-
tion was ineffective?
Q. Mr. Robb stated here in this room the other day that he would feel
very reluctant indeed to pick upon any particular bank and make an examina-
(Mr, C.:E, Neill.J
1—29
252 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
tion of that bank, because of the suspicion it would cast upon that bank; that
he would very much rather make an examination of all the banks in the regular
course of affairs so that no particular discrimination should appear?—A. I can
quite understand Mr. Robb’s feelings.
Q. Would you prefer a regular systematic examination of all the banks
rather than the selection of a particular bank for examination if the Minister
learned in some way or other that the affairs of that bank were not in as good
condition as he might hope?—A. Yes.
Q. I think that is satisfactory. The members were furnished some time
ago with a little pamphlet written by a man in Toronto, a copy of which I
have in my hand. Probably you have seen it. It is entitled “ A Better Banking
System for Canada,” and on page two the writer states: —
“The circumstances that finally brought the Home Bank into
insolvency were known to many people, myself included, five years ago.
It is not conceivable that those irregularities could have continued so
long under an independent audit and an independent scrutineer. ”
This man is a business man in Toronto who made some inquiries; he is
in the importing mercantile business. Did you know anything about the
condition of the Home Bank some years ago?—-A. Nothing definite.
Q. You heard rumours, I suppose?—A. I had heard that the bank was
supposed not to be in very good shape.
Q. Do you know whether the Bankers’ Association had any knowledge of
the condition of the Home Bank, say during the course of our sittings last
year, during April, May and June of last year?—A. No, so far as I know, the
Bankers Association had no definite information, so far as I know.
Q. Did you have any information which you regarded as reliable concerning
the condition of that Bank at that time?—A. I cannot answer that question;
I do not know. I may have had suspicions, or I may have had _ certain
information which I could not act upon, or which would not be reliable. But
I cannot say, I have no recollection. JI may say that the failure of the Home
Bank, when it came, the suddenness with which it came was a surprise to me.
Q. Do you feel that you know anything about the condition of Canadian
banks other than your own bank, at the present time?—A. By reputation only.
Q. Might it be possible that the auditing of some banks, already in
existence, is or has been, defective as was the audit of the Home Bank?—A.
Yes.
Q. What can be done to re-establish confidence in the auditing of the
Canadian Banks after what has occurred? What can be done to give some
assurance to the Canadian public that the statements issued by the banks from
time to time are accurate?—A. Possibly Government inspection.
Q. That then, in your judgment, would be a possible source of renewed
confidence?—A. Yes.
Q. And personally, you are prepared to endorse that point of view?—A.
Provided it is efficient and satisfactory.
Q. What do you mean by that, “ Providing the system is efficient?” What
have you in mind? I think the Committee would be glad to know?—A.
Provided the inspection is made by experienced, competent, and reasonable
ee banker; a man who is capable of judging properly the condition of
the bank.
Q. What kind of inspection would you regard as ineffective or harmful
inefficient inspection? What might happen? What would you regard as
inefficient?—A. Putting a man at the head of the inspection bureau who is not
competent and who does not know the business.
(Mr. ©. E. Neill.]
BANKING AND COMMERCE 253
APPENDIX No. 1
Q. What might happen in that case? Give an example.—A. If an ineffi-
cient or incompetent man went into the office of any bank to inspect it, he
might make criticisms entirely unjustified. He might not be able to value the
assets of the bank; he might not be able to understand the position of the bank.
Q. Therefore, he might do an injustice to the bank?—A. Absolutely.
Q. And create a feeling of alarm when there was no need of it?—A. Quite
right.
Q. That is what you have in mind?—A. Yes.
Q. Do you think that the shareholders of a ‘bank ought to be fully informed
as to the condition of the bank’s affairs?—A. Yes.
Q. Or should there be some information withheld from these shareholders?
—A. I can conceive that information such as applies to contingent funds or
hidden reserves, it might not be advisable to submit these to shareholders.
Q. Why should not the shareholders have that information?—A. For a
number of reasons. They might demand higher dividends if they thought that
a bank had too much in contingent account, and they would have no means of
judging how much a bank should have in contingent account.
Q. Why should they not be informed, reasonably, by the directors as to
what the condition was as to appropriations and reserves?—A. I do not think
there would be any good reason for doing so.
Q. There are certain matters which in your judgment should be kept con-
fidential?—A. Yes.
Q. How many people ought to know all these matters?—-A. The directors
of the bank.
Q. All the directors?—A. Yes.
Q. You think there is nothing that should be kept from a director?—A.
Absolutely nothing.
Q. Last year an amendment was proposed to Section 54 requiring addi-
tional information to be embodied in the annual financial statements of the
banks. I do not know whether you gave it attention at the time, but I will
read it so that you will get an idea as to what was asked for. The amendment
was voted down. (Reads):
“That the following words be added to subsection 4, section 54:—
“The profit and loss statement shall include and show on the one
part the amount of
(a) Balance of profit and loss account carried forward from previous
year;
(b) Rebate of interest on unmatured bills as at close of previous year;
(c) Gross profits, including balances of all interest, commission, exchange
and other revenue-producing accounts;
(d) Premium on new stock sold;
(e) Bad debts recovered, previously written off, and the statement shall
include and show on the other part:
(a) Expenses of management and operation;
(b) Interests paid on deposits;
(c) Interest reserved on unmatured bills;
(d) Amount written off bank premises;
(e) Amount transferred to appropriation account for losses;
(f) Amount transferred to officers’ pension fund;
(g) Sundry appropriations or disbursements not included under
foregoing heads, and to be shown in detail;
(h) Dividends declared (specifying number and date) ;
(7) Amount transferred to rest account;
(j) Balance at credit of profit and loss account.”
(Mr. C. E. Neill.]
jJ—293
254 SELECT STANDING COMMITTEE ;
14-15 GEORGE V, A. 1924
{s that new information which in your judgment should be furnished to share-
holders, and which, therefore, should be included in the annual statement; or
is it information which should be reserved, or part of it, for the directors alone?
—A. I think part of it should be reserved for directors alone.
Q. You are not therefore prepared to endorse the view that this informa-
tion should be provided in the annual statements to shareholders?—A. No, not
all of it.
Q. Do you think it would be safe for any further information to be given
to shareholders than is now required under the Act?—A. It might be for further
information that the shareholders might ask for; it might be quite safe to give
it to them.
Q. Would there be any objection to giving them any information as to
salaries and expenses?—A. You mean the salary of every official, or the com-
bined salaries?
Q. You could not give it in detail, I suppose?—A. There is no reason why
the shareholders should not have the aggregate salaries paid if they wanted it,
but it would not convey anything to them.
Q. Or the expenses of management and operation?—A. I see no reason
why they should not have the full figures.
By Mr. Woodsworth:
Q. There is objection to the individual salaries being given?—A. I should
think so; I would not like every one to know my salary.
By Mr. Good:
Q. Would there be any objection to giving that information to the share-
holders at a shareholders’ meeting if any one were to ask what the salary was
of any official?—A. I do not think that is customary in any company to have
a shareholder inquire as to what the salary of any official might be.
Q. That is rather a remarkable statement. However, I have some figures,
Mr. Neill, as to the Canadian banks’ earnings in respect to other banks, and I
would like to know whether you have looked into this matter. In 1922-23 the
net earnings were some $15,927,000 odd, and the dividends distributed, $15,563,-
000 odd on resources—with the total assets and total liabilities pretty much the
same—of $2,618,000,000; the figures for the Australian banks with earnings of
nearly $25,000,000, resources of $2,067,000,000; in the case of the Australian
banks my information is that over 30 per cent of the earnings are placed to
reserve. In the Banks of Australasia, with resources of $188,000,000, the earnings
in 1922 were approximately four and a half million. The Canadian banks—I
won't mention names—with resources of $427,000,000,—their earnings were
$2,388,000, showing a tremendous falling-off in the earnings of the Canadian
banks as compared with the Australian banks. Have you looked into these
comparative earnings of the Canadian banks with the American banks and the
Australian years?—A. No. Mr. Good.
Q. You have not looked into that at all?—A. No, I never have.
Q. Have you taken cognizance of the growing disparity of the proportion
between capital and total liabilities in the last twenty years?—A. Yes.
Q. Do you think the present situation is menacing in that respect?—A.
No.
Q. Do you regard it as desirable that there should be a minimum beyond
which the capital should not shrink? I understand at the present time the
relationship is about 4 per cent.—A. I have never considered the question; it
has never been sufficiently—
Q. Would it be safe for capital to disappear entirely?—A. No; there should
always be a reasonable ratio between liability and capital.
[Mr. C. E. Neill.J
BANKING AND COMMERCE 255
APPENDIX No. 1
Q. Have you examined the proportion between capital and the total liabili-
oat the average, say, in the American, European, and Australian banks?—
Wat
Q. Supposing you were to find that the banks elsewhere insisted upon, say,
a minimum of six to one—A. That is, six to one of your capital—one-sixth of
your deposits?
Q. One to six; put it that way—A. One-sixth of your deposits?
Q. Yes, one-sixth of the total liabilities; and you found the Canadian banks
had a proportion of one to 20; would you consider that perfectly satisfactory ?—
A. I would consider one to six much too limited.
. Q. That is, you think the capital in that case was super-abundant?—A.
es.
Q. Mr. Ladner brought this matter to the attention of the House some
weeks ago, and perhaps he will follow it up, but I have here—
Mr. Lapner: One to 10.
Tue Wirness: What are the English banks, Mr. Ladner?
Mr. Lapner: About the same, but in the Canadian banks you have to figure
the reserve.
The Witness: What about the deposits of a bank like the London City
and Midland Bank as compared with its capital?
Mr. Lapner: I don’t know—
Tue Witness: You look up that bank, and I think you will find it very
much higher.
By Mr. Good:
Q. I want to bring out whether or not you have considered this matter as
of some importance, because there is a very great disparity between the Cana-
dian situation and the situations elsewhere. I have some figures here showing
the capital and reserve as of 1914 at $228,000,000, and adding ‘the later payments
for new shares $34,000,000, making at present $262,000,000, after making de-
ductions for a considerable number of losses which have occurred recently—the
Merchants Bank and the Home Bank, etc.,—it is reduced to about $243,000,000.
During that time the liabilities have increased from $1,323,000 to $2,440,000;
roughly, the liabilities have been doubled and the capital has remained stationary
during that period of ten years. -Do you think that is regrettable?—A. No.
Q. Perfectly safe and sound in your opinion?—-A. Yes.
Q. No danger about that?—A. Not in the least.
Q. A suggestion was made here, Mr. Neill, that the provision for double
liability should be done away with, in order to make it a little more attractive
for investors and to increase the capital. What is your opinion?—A. I think
the banks do not object to the double liability, although it certainly would
make bank stock more popular if the double lability were removed. At the
same time it is a source of added strength to the depositors, and I see no reason
why the double liability should be removed.
By Mr. Ladner:
Q. Is it considered an asset to any extent in view of the experiences of
collection in the past?—-A. To a moderate extent only.
Q. Have you any idea of the figures?—A. It depends on the bank.
Q. Supposing a bank had $25,000,000 capital, from the experience in
collections in the past, to what extent ‘would you say that could be accurately
relied upon?—A. The only way = could do would be to take the experiences
[Mr. C. E. Neill.]
256 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
of the past as a basis. I cannot say, for instance, if a certain bank failed, what
you would be likely to recover from the bank’s liabilities. In some cases it
might be quite considerable, in other cases it might be very small—depending
on the stockholders.
By Mr. Good:
Q. Have you any particular objection to the proposal now being made to
wipe out double liability?—A. None whatever.
Q. So far as bank premises are concerned: Have you made any comparison
between the Canadian banks’ investments in bank premises and those in
other countries?—A. From time to time, yes.
Q. Are you aware that in the British and Continental banks the value of
the premises is about 1.1 per cent of resources?—A. I don’t know the figures.
Q. And that the rest of the branch banks outside of Canada and
Australia have a proportion of 1.5 per cent, and in the Bank of Commerce it
was 1.5 per cent, and that they wrote off one-eighth of the value per year at
that time—during 1898 to 1918; during 1914 to 1923 the appropriation fell off
by 73 per cent and that they are now writing off on the basis of 70 years’ term
of obsolescence. Have you looked into this matter at all?—A. Yes.
Q. Could you give the Committee information as to what the Royal Bank
has done? Has there been less writing-off at present than fifteen years ago?
A.—There has been more writing-off.
Q. A larger proportion?—A. I do not know about the larger proportion.
Mr. Good, but certainly a very much larger amount.
Q. I am told the present term of obsolescence of the Bank of Montreal is
200 years. Is that right?—A. I do not know.
Q. Do you know what percentage of premises the Canadian banks have
to their total resources?—A. No.
Q. You have not looked into that?—A. No.
Q. I am told it is around 3 per cent, as compared to what the other banks
regard as safe, 1.5 per cent?—A. Of course, conditions in Canada and _ the
Canadian banks are different than those of the European banks. Canadian
banks have expanded very materially during the last 20 years, and for that
reason it has been necessary for them to buy properties and build buildings to
cover their increased activities, whereas the European banks have not been
extended in the same way.
Q. Do you think there is an over amount, or too large amount of the
resources of the banks’ capital tied up in real estate at the present time?—A. It
is quite possible mistakes have been made in some cases.
Q. What would happen in the case of a depression overtaking the banks
with a lot of real estate on their hands? Would that threaten the solvency of
the banks?—A. I cannot say the solvency of the bank would be threatened by
the amount of real estate it owned. ‘
Q. Supposing a bank became insolvent, what would be realized out of the
bank buildings?—A. In most cases, very much less than they cost.
Q. For instance, take the Bank of Toronto, in Toronto?——-A. I would not
like to specify the Bank of Toronto, or any other Bank, but as a general
proposition I would say that you could not recover in most cases as much as
you had invested.
By Hon. Mr. Stevens:
Q. In buildings?—A. In buildings.
Q. That does not apply necessarily to the ground values?—A. No.
[Mr. C. E. Neill.]
Se ea
BANKING AND COMMERCE 257
APPENDIX No. 1
By Mr. Good:
Q. I was referring to the buildings, not to the site values—A. We have
bought a number of bank properties, and it has been our experience that we
never got as much out of the buildings as we expected to. é
Q. Have you taken cognizance of the drift of deposits during the last few
months since the failure of the Home Bank, away from certain of the smaller
Canadian banks?—A. I have, but do you think, Mr. Good, it is wise for us to
discuss that?
Discussion followed.
By Mr. Good:
Q. I shall omit some of my questions, but refer to one which has to do
with the percentage of the net profits paid up by various banks during the last
year or so. My opinion is that in one of the States of the Union with resources
of $593,000,000, the percentage of shareholders’ profits was 1-3 per cent, and
the percentage of the profits paid in dividends -53. In three banks in Australia
the shareholders’ profits were 1-34 per cent, and the percentage of them paid
out in dividends 69. The Bank of Montreal—I cannot give the resources there,
but it is immaterial—the shareholders’ profits were -56. That is, less than one-
half; with 97 per cent of that paid out in dividends. In the Royal Bank—Mr.
Neill ought to know something about this—-62 per cent, with 96 per cent paid
out in dividends. The Bank of Commerce, -62 per cent, with 93 per cent paid
out in dividends. I want to ask if you have looked into these matters, and if you
have any opinion to give to the Committee as to whether these figures are right,
and if something should not be done, and if that does not indicate a situation
which requires some remedy. If my information is correct, this comparison
shows that the situation in Canada is not as good—A. It shows the Canadian
banks are not making a large profit, which is absolutely the case.
Q. Why should they be paying out all of the net profits in dividends?—A.
because it makes provision for their debts, and after making a provision for
them, and all necessary appropriations, ‘there is no need why they should not
give to the shareholders—having built their reserves up almost equal to capital—
Q. The only question I wish to raise is a general question. I am not satisfied
to let these matters proceed, but after what has happened, I think that 'as
representatives of the public they should be informed as to what the facts are,
but they have no means of knowing. Mr. Neill does know about a lot of these
matters, and I think this Committee ought to know from somebody what the
situation is, so that we may take the proper remedies; otherwise I see a repeti-
tion of what has happened in the last few years.
By Mr. Ladner:
Q. Mr. Good covered a part of this, but I want to ask one question in
regard to double liability. Is double liability considered as an asset in any of
the bank statements?—A. No.
Q. You have not information regarding the amounts collected in double
liability in connection with bank failures during the past three years?—A. No.
Q. In your opinion does the double liability in Canada act as a deterrent
to investors in the capital of bank shares?—A. Yes,
Q. Do you think it is in the interest of the public and the banking business
to repeal that clause?—A. No.
Q. Well, in experience, little has been collected, as I understand it, from the
double liability clause in the case of banks which have failed. Strong ‘banks,
of course, do not fail. That is correct, is it not?—A. Yes.
(Mr. C. E. Neill.]
258 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. You have told us that it does act as a deterrent to the investment of
capital. Where is the justice or wisdom of saddling really innocent shareholders
with a double liability if it is neither an asset of the bank and at the same time
is a deterrent to the investment of capital?—A. It is an asset to some extent.
2 Q. To what extent?—A. That depends on the responsibility of the share-
olders.
Q. It is very limited, is it not?—A. It is, but it is conceivable that you might
collect the full amount.
Q. If business should develop in Canada during the next 13 years in the
way it has developed during the past 13 years, just about three times as much,
while capital has increased 23 per cent—do you not think it would be wise if
we could encourage the investment of capital by eliminating the double lability?
—A. So far as the double liability is concerned, it certainly adds some strength
to what is there for the creditors. Take the bank which I represent; we have a
capital of $20,000,000; we have a reserve of approximately $20,000,000. Suppose
you only collected 50 per cent of the capital under the double liability, there
would be another $10,000,000, which would give a margin of $50,000,000 before
the depositors would suffer.
Q. But these large institutions do not fail. Take the instance’ of the Home
Bank which did fail; the amount collected is very small, is it not?—A. You
cannot tell how much is going to be collected in the Home Bank yet. Mr.
Ross informs me that 90 per cent of the double liability in the Bank of
Yarmouth was collected and 93 per cent in the Bank of Ontario was collected.
Q. How much in the Farmers’ Bank?—A. I do not know, I have not the
figures.
Mr. Ross: I have no knowledge of that case.
Wirness: As a matter of fact, speaking from the standpoint of the banks,
we would like to be relieved of the double liability. On the other hand, it
undoubtedly safeguards the public and the depositors to a certain extent, and
perhaps they are entitled to it. So far as the banks are concerned, obviously,
we would like to see the double liability clause removed. At the same time, we
would never ask for that because it is an added strength to the depositors.
Q. Now, a proposal has been made to work out on the insurance principle
the protection of a special class of savings accounts up to $3,000, so that the
average person who wants protection can go to the bank and instead of taking
the regular 3 per cent interest, he would take the class of savings account where
the percentage of interest would be a little less, and in that way he would con-
tribute towards the premium. Generally speaking, that is the proposal. Do
you think that something along that line would be worked out to the advantage
of both the banks and the public?—A. I am afraid it would be impracticable,
and misleading. I do not know what the proposal really is; I have not studied
it, and have no knowledge of it.
Q. Along the lines of the banks’ circulation redemption fund?—A. Can
you make any fund large enough to protect the small depositors? How much
would you have to have; how much would the banks have to put up?
Q. It would apply to depositors with $3,000 and under. Have you any
idea of how much that represents in the total deposits of the banks?—A. Of
the savings accounts, between 75 and 80 per cent. The Bankers’ Association
have prepared data on that point, and it shows that the small depositor in the
savings accounts in the banks is a very material factor.
Q. Have you worked it out on the basis of deposits of $3,000 and under?
—<A. It is for six banks, but they would not be the six largest banks, because
[Mr. G E. Neill.)
BANKING AND COMMERCE 259
APPENDIX No. 1
in our own case we did not take every branch; it is too much to do. We took
some of the branches which we considered good examples.
Q. To represent the average?—A. Yes.
Q. This statement applies to deposits of $3,000?—A. Seventy-eight per
cent. Between $3,000 and $5,000, 12 per cent, and in the case of $5,000, only 10
per cent. Therefore, if you are going to protect 90 per cent of the savings of
depositors in Canada your fund must be enormous.
By Mr. Good:
Q. Why should it be enormous if the percentage of losses is small?—A.
You mean if a small bank fails?
Q. No, why should the fund be enormous if the percentage of losses on the
average is small?—A. I do not know what Mr. Ladner’s scheme is. He says it
would be a fund lke the bank circulation redemption fund.
By Mr. Ladner:
Q. The proposal is this, that in addition to your existing system with its
different accounts, current and savings accounts, you create a special savings
guarantee, or whatever you care to call it, to protect the savings account which
would draw less interest than the regular savings accounts so that people who
sought protection would know that the money was there when they wanted it
—where they could put their money and up to the sum of $3,000 or less they
would be protected by an insurance fund worked out on an actuarial basis upon
past experience, with the rate of insurance calculated in that way; in that
manner, the depositor paying a portion, and perhaps the bank paying a portion
to that special account because they would have some benefit. That would
constitute the premium and to the extent of that fund the protection would be
given. That is the proposal?—A. Is not that just guaranteeing in a different
form deposits, and you know that the guaranteeing of deposits has been very
disastrous.
Q. We had Mr. Skelton Williams here the other day, and Mr. Pole to
explain the guarantee of deposits in the United States. This is a limited guar-
antee, limited to the extent of the fund, in the first instance?—A. You do not
think it would be misleading?
Q. Why would it be misleading to state to the public what it is?—A. Sup-
posing a large bank had $1,000,000 of deposits, and supposing that bank failed
and lost everything; what insurance fund could ever protect those depositors?
Q. It is very unlikely that it would work out that way?—A. It is unlikely,
but it is a possibility.
Q. Do you not think that the banks which had the responsibility for that
particular fund would perhaps invest a certain portion of the deposits in such
a way that they would really be a protection for that fund?—A. I think this,
that any guarantee of deposits or insurance of deposits—any scheme of that
kind lends itself to bad banking.
Q. In what way?—A. The management in some cases. It is quite con-
ceivable that if the management of a bank thought the depositors were going
to be paid they would take greater risks in making their loans and in conduct-
ing the affairs of the bank. ,
Q. They would also have their responsibility?—A. Yes, but I think it has
been generally understood and taken as an accepted fact that the insurance or
guarantee of deposits is apt to lead to unsound banking.
Q. Mr. Skelton Williams who was here the other day is a former Comp-
troller of Currency in the United States. He was Comptroller of Currency for
seven years, and he has worked it out that in the United States they can guar-
antee deposits in that way up to $5,000 at a rate of $25 per million dollars and
be absolutely protected——A. Where would they be insured?
(Mr. C. E. Neill.]
260 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. They would work out their own insurance scheme on an actuarial basis
on past experience. :
Q. Is there any information that you have, or that Mr. Ross may have,
with regard to the difficulties in this country, now that we have the information
that 78 per cent of the deposits are in accounts of $3,000 and under? Is there
any information available?—A. No information at all, so far as I know.
Q. My point is this, and it is greatly strengthened by the information that
we have that 78 per cent of the deposits are held by people with accounts of $3,000
and under—it shows that the mass of the people are putting their money in in
that way—do you not think it would be a help to the banking institutions
themselves to have some scheme of protection?—A. No, I do not know, because
I am afraid it is not practicable. I do not see how it could work out. If you
can show me how a scheme of that kind would be worked out, I am sure that
the banks would be glad to consider it; but I do not think it is practicable.
Q. But Mr. Skelton Williams who for seven years was Comptroller of
United States Currency, and who is, apparently, a very expert man, has worked
it out and recommended it to Congress. Would not that be good authority ?—
A. It certainly would, but there might be another authority equally as strong
as Mr. Williams who might say it was wrong.
Q. In view of the situation in this country as we all know it, do you think
it would serve a purpose if authorities like Mr. Williams and others behind the
idea, if some committee of experts could say whether a proposal like that would
be practicable in Canada, or could be worked out to the advantage of the public
as well as to the banks?—A. No, I am afraid I do not think it would be advis-
able to do that, because I do not think any acceptable scheme could be worked
out.
By Mr. Good:
Q. Would you be prepared to study it?—A. Absolutely, I am prepared to
study anything that is constructive and give it the best consideration.
By Mr. Ladner:
Q. I am trying to contribute something toward the solution of the sub-
ject. I do not know much about the subject, but with the authority of Mr.
Skelton Williams and experts like him, do you not think you might be able to
work out a scheme?—A. I do not think we could, but there is no reason why
we should be prepared to receive any constructive scheme that may be sub-
mitted.
Q. Could not some one of the bankers bend their expert knowledge to some
idea of that kind?—A. They might, but I do not think they would like the idea;
they do not believe in it.
Q. Has any calculation been made on which you could base your opinion
that the scheme is not practicable?—A. No, the only thing we base our opinion
on is I think what has occurred in the case of deposits which have been guar-
anteed.
Q. That is very different in the United States. In the United States all the
deposits are guaranteed?—A. Yes. Is not the principle the same?
Q. No, because down there all deposits, current and savings, are guaran-
teed. Is that right?—-A. I think so.
Mr. Ross: No, the class of deposits guaranteed were not savings. Anything
that got interest was not guaranteed.
By Mr. Ladner:
Q. That is simply a guarantee of good and bad business; that is a different
proposal altogether. Down there they guaranteed what we call the current
[Mr. C. E. Neill.]
BANKING AND COMMERCE 261
APPENDIX No. 1 »
account; that is the accounts of men engaged in business and ventures of busi-
ness. This proposal is to guarantee the man who pays his money to get it?—A.
All I can say is, as I said before, I do not think, I am afraid the scheme is not
practicable; but if you can work out any kind of scheme that is constructive,
I am sure that all the banks would only be too glad to discuss it with you.
Q. The Bankers’ Association have issued a pamphlet in which they
endeavour to show the impracticability of such a proposal by comparing it with
schemes that have been worked out in the United States. I want to draw to
your attention and to the attention of the Committee that the two proposals are
entirely different. As Mr. Ross states one protects the current accounts, and
this protects the savings accounts?—A. I think the thing for you to do would
be to make a statement showing what the situation was as regards the guaran-
tee of deposits in the United States and what your proposal is. It is not clear
to me how you can do it. If you can tell us how you ean do it, I would be very
glad to give you my opinion for what it is worth.
By Mr. W. F. Maclean:
fi Q. Are you in favour of priorities of this kind in connection with banks?—A.
0.
Q. Are there any priorities in the banks?—A. The Government deposits,
yes.
Q. And is not the bank note circulation also a priority?—A. Yes.
Q. It has to be paid out of the deposits?—A. Yes.
Q. Would it not be much better for the safety of the public if we had, as
they have in the United States, banks only using national currency?—A. I am
not in favour of the banks giving up their circulation privileges.
Q. But the public are perhaps in favour of it. Now, Mr. Neill, you said
you were in favour of bank inspection if it was thorough. Is that your opinion—
if it was efficient.—A. Yes.
Q. Would you consider the national system of bank inspection, the system
of inspecting National Banks in the United States efficient?—A. So far as I am
informed with regard to it, I would say it was efficient.
Q. And practically it does not do any injury to the banks?—A. So far as
I know, it does not.
Q. They have a system whereby the examiner can go into a bank whenever
he likes’.?—A. Yes, to the National Banks.
Q. About mergers, we have had quite a number of mergers of banks in this
country? That is a fact——A. Yes.
Q. And there is talk of other mergers in this country. How many banks
have we now?—A. Fourteen.
Q. Ought there to be any limitation of mergers in this country ?—A. I should
think so.
Q. Where would you place it? —A. That depends on circumstances. I
think that if a bank is in bad shape it is very much better for it to merge than
toy faa:
Q. I might agree with you in that. In connection with the Home Bank
there was some proposition with regard to merging it, but it probably came too
late. Was there not an appeal made to the banks generally to try and save
that bank?—A. Not so far as I know.
Q. You are in favour of bank inspection if it is efficient and you have no
great objection to the system of Federal bank examination in the United States
as applied to National Banks?—A. I do not think that the United States system
can be introduced into Canada. They have unit banks and we have branch
banks.
(Mr. C. E. Neill.]
262 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. That brings up the question whether the system of branch banks is the
best for Canada?—A. That may be.
Q. What is your opinion about that?—A. I am a believer in the branch
bank system.
By Hon. Mr. Stevens:
Q. Mr. Neill, I would like to ask just a few questions. First, in regard to
bank examination, you used the work “efficient.” I would ask you this: You
say you would not object to Government examination if it were efficient?—A.
And reasonable.
Q. In subsection 10, of Section 56, there is a very important clause in regard
to the present audit system, having reference to the auditors calling for certain
reports to be made to directors and managers by the auditors under certain
conditions?—A. Yes.
Q. Do you see any objection to the making of that same report to the
Minister?—A. No.
Q. You see no objection to that?—A. No.
Q. If we had under the Minister in the Finance Department a competent
officer whose duty it was to review such reports and study them, do you see any
objection to that officer having the additional authority of enter .and examine
the head office accounts?—A. None whatever, so long as he a competent man.
Q. Or certain other branches that he might wish to examine in order to
keep a check?—A. None whatever. I believe that any competent man appointed
by the Government could go into the head office of any bank in Canada, and in
a very short time he could decide whether that bank is solvent or not. I have
no hesitation in saying that.
Q. You mentioned efficiency; would you mind giving to the Committee what
the interpretation of what an efficient officer is; not only an efficient officer, but
an efficiert' method, having in mind what you have just said——A. You mean in
the evenv of the Minister of Finance appointing an inspector whose duty it
would be to go into the head offices of the different banks? I should think that
an efficient officer would be a bank officer of experience, a man who has had
experience at a branch, who has had experience in loaning money, who has had
experience in valuing assets, and who also has had head office experience, because
head office experience is necessary in order that he may be able to take a bird’s
eye view of the situation.
Q. You think that such an officer is obtainable in Canada?—A. I should
say SO.
By Mr. W. F. Maclean:
Q. Under whose orders?—A. The Minister of Finance.
By Hon. Mr. Stevens:
Q. Such an officer put under the control and employment, shall I say, of
the Minister of Finance, or the Government and wholly responsible to the
Minister of Finance?—A. Yes.
Q. Not responsible to the banks at all?—A. No.
By Mr. W. F. Maclean:
Q. My point is that there ought to be an officer of that character who
would imperatively perform those duties if he sees fit to do so. He is only to
be subject to the Minister of Finance?—A. There is no objection to that.
Q. In the United States the examiners do it, and must do it?—A. That is
quite acceptable.
(Mr. C. E. Neill.]
BANKING AND COMMERCE 263
APPENDIX No. 1
By Hon. Mr. Stevens:
Q. That is what my question was intended to bring out, that this examiner,
if such an examiner is appointed, should be responsible to the Minister represen-
ting the Government, and have the full authority to make those examinations?
—A. It should be his obligation to go into every bank and do it so that there
would be no picking out of one bank as against another.
Q. Your bank has branches in the United States?—A. In New York.
Q. You have had some personal experience of the examination system in
the United States?—A. Very limited, they do not bother us much.
Q. Having in mind your knowledge of the banking system over there, do
you know anything about the clearing house inspection system?—A. I have
a very limited knowledge, Mr. Stevens; I know that in New York the clearing
house privileges are very closely guarded to American banks. It is very
difficult to get into the New York clearing house, and in order to protect
themselves, they have the privilege, when a bank comes into the clearing house,
to say ‘““We demand the privilege of coming in and inspecting you as a clearing
house any time you want to.”
Q. That is apart from the State examination?—A. Yes.
By Mr. W. F. Maclean:
Q. It is not a part of the Federal Reserve System?—A. Nothing to do with
it; the clearing house does that.
By Hon. Mr. Stevens:
Q. It has nothing to do with the Government or State examination of
reserve banks or any State system?—A. None whatever. That examination is
made whenever the clearing house deems it advisable to do so.—Q. It
is controlled wholly by the clearing house the members of which are member
banks?—A. Yes.
By the Chairman:
Q. Members of the National or State Banks?—A. National, I think. I am
not really sure. But that is my impression and I think I am right.
By Hon. Mr. Stevens:
Q. I do not think it is limited to National Banks. Do you know how
many cities practise this clearing house examination?—A. No, I do not know.
I think Chicago and New York. I think most of the larger cities have it, but
I am just guessing when I say that.
Q. Is that looked upon as an additional safeguard to the public and the
banks?—-A. I should say so.
Q. To the general State examination?—A. I should say so.
Q. In regard to the Canadian system of examination would you mind
giving to the Committee briefly an outline of the Canadian banking system
inspection; that is taking your internal banking inspection, your double audit,
and the clearing house inspection in Canada?—A. We have no clearing house
inspection in Canada.
Mr. W. F. MacLean: That is the very point I want to raise. Why not
have it here?
Wirness: It would not be practicable here. We have discussed that
among ourselves, a system of clearing house examination. For instance, in
Montreal, it would not be practicable in the same way as in New York because
there you have the business of the bank under the one roof. A clearing house
examination would not be a satisfactory examination for banks with branches
all over the country. [Mr. ©. E. Neill.]
14 'e le eul.
264 - SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Hon. Mr. Stevens:
Q. Would you mind dealing with the system of inspection we have here?
—A. Under the system of internal inspection—the Canadian banks have all an
elaborate system of internal inspection; every bank must be inspected once or
twice each year, or perhaps oftener by a competent man who goes into the
business very thoroughly. They count the cash, they certify to the securities
of all the assets, and they value the assets. These inspection reports come to
the head office and are studied by the credit department there, and any weak-
nesses are pointed out to the manager, and those weaknesses are rectified if at
all possible. The auditors appointed by the shareholders, so far as our bank is
concerned are practically in the bank from the 1st of January until the Ist. of
December. They are very thorough, they have access to the general ledger in
the head office, to the Government returns, to all branch returns, to the inspec-
tion returns, and to all correspondence. For instance, if the general manager’s
department criticise a manager for making a bad loan, where the loan is of any
magnitude, the auditors see that and are able from that correspondence to
determine whether the loan is a good or a bad one.
Q. As a matter of practice, do they examine that correspondence?—A.
Very carefully in certain accounts. It is a comparatively easy matter for a
competent auditor, to take the branch liabilities return and to size up in a very
short time the weak accounts in that return, the large weak accounts; the small
weak accounts make no difference. A bank never fails because of the small
accounts; it is always when there are three or four big accounts weak that they
go bad.
Q. In regard to the change made last year, making the audit dual, what
effect has that had in practice?—A. I can only say that in our case it has meant
the appointment of another firm of auditors. Before we had two; now we have
three, and we have to rotate. We have three different firms to pass on our
assets.
Q. In your experience of the past year, have you found any reports from
the auditors regarding accounts that did not occur before?-A. Yes, the auditors
made certain reports under the revised Bank Act to the directors of the bank;
they made special reports of accounts over one per cent, I think, of the capital.
Q. Now, in regard to the terms of our Finance Act, as compared with the
Federal Reserve Act, you will recall that our Finance Act gives certain privi-
leges to the banks, in sections 2 and 3, permitting virtually the discount?—
fy, Yee.
Q. Would you compare the terms of our Finance Act and its facilities,
briefly, with the Federal Reserve discounting system?—A. My opinion is that
as far as the needs of Canada and the Canadian banks, and the Canadian public
are concerned, that the re-discounting facilities granted by the Finance Act are
quite satisfactory—all we need.
Q. Do you take advantage of it?—A. We do.
Q. Do most of the banks?—A. At certain times.
Q. You find it a convenience in doing business in supplying additional
credits in rush periods?—A. Yes, a great convenience, and it works admirably.
Q. And you consider, having in mind the Branch Bank System in Canada,
as compared with the Unit Bank System of the United States, this is a fair
corollary of the Reserve System over there?—A. Yes, it answers our purpose
to the same degree, and possibly to a better extent than the Federal Reserve
Bank answers the purposes of the banks in the United States.
Q. What have you to say, Mr. Neill, as to the charge that with the branch
bank system, the districts served by remoter branches suffer as compared with
[Mr. C. E. Neill.]
BANKING AND COMMERCE 265
APPENDIX No. 1
the central districts?—A. I do not think there is any ground for such a state-
ment.
Q. Would you care to give any reason for that?—A. We endeavour to take
care of our customers—the banks all endeavour to take care of their customers
to the fullest extent possible.
Q. Would you say whether there is any comparison as to depositors in any
given district—say my own province of British Columbia—as to the difference
between the loans and deposits-—.A I should say that in British Columbia the
deposits are higher than the loans.
Q. That would come from the east?—A. No, the deposits come from British
Columbia. I think the British Columbia deposits are higher than the loans.
Q. Do you consider there is any suffering locally because of that?—A. No.
Q. Have you any complaints?—A. We have complaints, yes, but no legiti-
mate complaints. You will always have complaints if you do not lend enough
money.
Q@. Having in mind that the west is a developing district—British Col-
umbia, for instance—do you think it would be desirable to provide for the
maximum of loans there?—A. We will be only too glad to, when we have good
loans offered.
Q. That is a question of collateral?—A. British Columbia is not a manu-
facturing centre, Mr. Stevens——.
Q. Be careful about making that statement
depends on the nature of the province.
Q. I cited British Columbia not because I live there but merely as a unit.
How about the other three western provinces? How will the loans and deposits
compare?—A. I think in the middle west the people have a larger proportion of
loans than any other district.
Q. As compared with their deposits?—A. Yes, I think they have received
much the most liberal treatment.
By Mr. Hanson:
Q. How about the Maritime Provinces?—A. Of course, the Maritime Pro-
vinces are really more of a depositing centre than a loan centre.
By Hon. Mr. Stevens:
Q. In regard to the Finance Act, Mr. Neill, and provision for discounting:
what are the demands made by the Department of Finance as regards securities?
—A. The securities are specified in the Act, and the banks really apply for a
loan on credit, and put up their securities, and get it when they need it.
Q. What do they get?—A. Legal tender.
Q. Yes, but what form does it take?—A. Legal tender—we put up our
Dominion bonds
Q. Dominion notes?—A. Yes.
Q. What do you do with them?
Mr. Macriean: Convert them into bank notes.
Tue WItTNEss: We use them.
By Mr. Shaw:
Q. Do you take them to the Gold Reserve and get bank notes?—A. Yes,
they are used in our business, to take care of our loans.
By Mr. W. F. Maclean:
Q. In the Central Gold Reserve?—A. Yes, we deposit them in the Central
Gold Reserve.
A. I think a great deal
!
{Mr. C. E. Neill.]
266 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And your circulation takes the place of legal tender?—A. No, our cir-
culation is covered by legal tender over paid-up capital. As far as we are con-
cerned we could just as well circulate the small legal tender over the amount
of paid-up capital. We get no advantage whatever out of circulations over our
paid-up capital.
By Hon. Mr. Stevens:
Q. In other words, if you re-discount and get legal tender issue of your
own notes, you can only issue to the amount of the legal tender you receive?—
A. We can issue our own notes up to our paid-up capital—in our case, $20,000,000
—and any issue over that we have to issue from the Gold Reserve, which in the
case of the Government of Canada gets the advantage of that circulation.
While our notes may be circulating, the Government of Canada gets the
benefit of it. They get the profit on it.
Q. Speaking of that profit, Mr. Skelton Williams stated that the Federal
Reserve Bank since 1913 had earned for the Government in profit $135,000,000;
is there any comparative earnings in Canada under our Finance Act system ?—
A. Yes, the Government makes very important profits out of the Finance Act.
Q. Have you any records or figures on it?—A. Yes, I think I have a state-
ment here of what the Government has made.
Q. I think that would be very interesting-—A.
INTEREST RECEIVED BY THE GOVERNMENT ON LOANS TO BANKS UNDER THE
FINANCE ACT
Year Amount
TULA i ei. a eee RE Ce Mee, eeees ee “eae
VOD DUG hake ee he eee cae ee ee 62,722 49
LOUGEE Tt hg cede Oras. peers. Meee 177,690 24
OWT - TS, SE Ay eee Bee ae A 869,125 83
IGIS-T9 ea ee eae os oe ee ee ee
1910-20 sc urtimey ofthe posh wese, ace wel kaee ele ee
de es om ecopriede tint. ced ak oaetaat tet ge et ee) Wee
Peat e2e ik circa stem py gener Mehta etn ee ee oe
Lge ae on stie at teenie peer ere Dee rey ee oun ae
gS 2 Ee aes eS rie ere See 775,170 38
2425 TOA bead a A eee 10,306 26
$15,297,347 66
By Mr. Sales:
Q. In 10 years?—A. Since 1914, when it was started.
By Hon. Mr. Stevens:
Q. The Act came in in 1914, yes. It isa corresponding profit t
( . S otheG ~
ment of the United States?—A. You must understand, this, that As ee
Reserve Bank in the United States has a wonderful system, and has built up a
great organization, and the profits of that system are principally due to re-
discounting. If money gets easy, it means that source of profit will not be there
Q. It will diminish?—A. Yes; as a matter of fact that class of profits is
diminishing pretty much today. I was in New York last week and I was told
2 aes set we Nadine io was working itself into such a position
at possibly 1t would not make enough to pay its expenses. i
that is the case or not; that is just hearsay. ve oe ig tape Ree
Q. Let me ask you a question on that. For instance t i
loan money in New York was 3 to 34?—A. 25, the day Be ek eepas bine call
[Mr. C. E, Neill.] ;
BANKING AND COMMERCE 267
APPENDIX No. 1
Q. I know it has been very low for some time. Your point is this; when
call money and term money, which I think was quoted yesterday at 4, is at that
rate of interest, then the re-discounting privileges of the Federal Reserve will
not be taken advantage of ?—A. No.
Q. Until that market money is absorbed. And this period during which
the Federal Reserve made $135,000,000, the profits would be during the same
period when the Finance Act in Canada showed a large profit?—A. Yes. When
money gets easy in Canada, you will find the Government will not make as
much money out of the Finance Act as when money was tight.
Q. In other words, the Federal Reserve System produces earnings in cor-
responding ratio to the same shown in this statement of the Finance Act?—A. I
have not made a comparison, but generally speaking, that is correct.
Q. And of course this $135,000,000 profit of the Federal Reserve Banks,
represents the huge business of the United States, and shows that the Canadian
Finance Act and re-discounting system of $15,000,000 is a fair— A. Obviously
we have no expenses in Canada. In the United States, they have great expenses,
to keep the organization going.
@. You mean no expense to the Government?—A. No.
Q. All expenses paid by the bank?—A. I don’t know what expense there
could be. The expense of the Central Gold Reserve is paid by the bank.
Q. I want to ask one more question regarding the capital and its ratio
to liabilities. This has been brought up on two or three occasions, Mr. Neill.
It has been pointed out that the Canadian bank’s capital as compared to their
liabilities is not nearly so high to-day as it was in 1913, at the time of the
last revision of the Bank Act. I think I can put this without being too long.
The capital of the Canadian banks was mostly subscribed for and paid in prior
a the war. There has been comparatively little since—of new capital?—A.
es.
Q. Then the capital — that is, the figures or the amount stated in the bank
statement would not increase with the inflation of currency?—A. No.
Q. The figures would remain about the same—that is, the figures
representing your liabilities and assets would, with the inflation of currency,
increase rapidly?—A. Yes.
Q. Without a necessarily accompanying increase of value. Do you see
my point?—A. Yes, I see your point.
Q. In other words, I think Fisher’s Index shows that the dollar to-day is
worth about 58 or 60 cents—
An Hon. Memeber: 58 cents.
Hon. Mr. Stevens: Well, we will say 60 cents for illustration. It varies,
of course. Your capital to-day is virtually the same as it was before the war,
still remaining at the figure of 100?
The Witness: Yes.
By Hon. Mr. Stevens:
Q. And your liabilities, by this inflation apparently, common to the whole
world, and the purchasing power of a dollar being 60 cents, in order to make
a fair comparison, your capital should be reduced to 60 per cent?—A. TI do not
like to answer a question like that offhand. In comparing capital with total
liabilities I think it is hardly fair to compare it with Australia or South Africa
or even the United States or Great Britain or France. These figures could
be prepared and submitted to the Committee, and I think the Committee would
find that the ratio in Canada is quite satisfactory.
1—30
[Mr. C. E. Neill.]
268 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. I was going to ask you a question regarding the figures quoted by Mr.
Good about earnings and distribution. When you say “ net earnings” you have
already provided for bad debts, contingencies, depreciation and reserve?—A. Not
depreciation; for bad debts, and all expenses, yes. Depreciation and bank
premises are shown on our statements, as a rule; some banks show them and
some banks do not.
Q. When you show a net earning of your bank, you distributed 96 per cent,
as Mr. Good says—A. Yes.
Q. —would that figure of net earnings in your bank statements be the net
earnings after making provision for bad debts and contingencies?—A. Yes.
Q. Now, the figures regarding the Australian situation —this is merely a
question of accounting, or method of accounting—sometimes an accountant will
show the net earnings and make his provisions afterwards.—A. You have to
compare the statements of the different banks. You could not make a comparison
offhand, because the procedure varies in the different banks.
Q. And therefore, without having before you the exact statement of the
Australian— A. You could not make a correct comparison. It might be mis-
leading.
Mr. Goon: I protest against any insinuation that my statement was mis-
leading.
Hon. Mr. Stevens: I was not suggesting it was misleading. I am sorry
Mr. Good has taken offence. I say there are two systems, perhaps not of
accountancy, but two methods by which an accountant will show the final
workings-out of his statement, one accountant or auditor might show the net
earnings before he makes provision for certain contingencies or bad debts, or
depreciation; another might make it after, and I say that in the absence of
that knowledge you cannot make a fair comparison.
By Mr. Irvine:
Q. Do you know the habit of the Australian banks?
Hon. Mr. Stevens: I have never met two auditors who did not make the
final outcome of their statements a little different.
Q. You would have to have his profit and loss account before you, to
determine that fact?—A. Yes.
Hon. Mr. Stevens: This is no reflection upon anybody. Is it simply a
question of how they would bring out their final figures.
Q. I want to ask a question or two in regard to these statements. I will
ask you first as to the figures; there is a resolution here by Mr. Coote in regard
to which I might say that personally I have a great deal of sympathy with
and support for it in a general way. It reads as follows:
“That in the opinion of this Committee, legislation should be brought
down this session to provide for the establishment of long-term rural
credits.”
As a banker, do you recognize the need for providing, particularly in certain
agricultural districts of the country, for long-term rural credits, which are not
now covered by any possible banking provision?—A. I do.
Q. Would you have any criticism or objection to a measure, having that
end in view?—A. I would approve of it.
Hon. Mr. Stevens: J am very glad to get that statement.
Q. I would like to ask you for an expression of opinion, if you care to make
one, or any suggestion, Mr. Neill, in that regard—aA. I will again quote, if you
will permit me, from what I said at our Annual Meeting:—
{[Mr. C. E. Neill.]
.
;
:
BANKING AND COMMERCE ~ 269
APPENDIX No. 1
“Undoubtedly there is, as has been stated, a barren area of credit
in the Prairie Provinces, but the credit on land required there can not
legitimately be supplied by banks. Such loans as are required for the
development of farm properties are almost a form of capital investment
and can be repaid by the borrowers only over a lengthy period. The
imperative duty of the banks to their depositors is to avoid just this
class of business. Deposits, repayable on demand must be utilized in
loans which are quickly collectable. Long-term loans against land must
be provided by companies constituted for that purpose. It is gratifying
to know that the Dominion Government have appointed a commission
to study the whole question, and it is clearly the duty of banks to
encourage actively any sound scheme that may be put forward in this
connection.”
Q. Then you and your associates, Mr. Neill, will be very glad to co-operate
—A. In every way we can, because what is in the interest of the country, is in
the interest of the banks.
Q. There is another resolution suggested, which I wish to ask your opinion
on. It is a resolution by Mr. Garland, and reads as follows:—
“That Schedule “G” of the Bank Act under the caption ‘ Assets’ be
amended by adding thereto the following items:—‘ Appropriation Account,’
‘Contingent Reserves,’ ‘ Undistributed Profits’.”
In other words, this calls for a disclosure of these statements. Would you
mind again telling the Committee, as I think you did last year, your reason for
objecting to that being included—if you still have that objection?—A. I think
the contingent or secret fund of the bank should not be made public. There are
many reasons why they should not be. In the first place, a comparison would
be made between certain banks, and banks which had a very large contingent
fund might be compared unfavourably with banks with a smaller contingent
fund, whereas in some cases, a prudent banker might consider it advisable to
write off debts which looked a trifle doubtful, and another banker might not
think it so necessary to make such an appropriation. The contingent funds of
one bank might be larger than the contingent funds of another bank, and at the
same time the actual position of the banks might not be very different. Every-
thing depends on the wisdom of the men who are writing down the doubtful
accounts.
Q. Your bank, like all banks, is distributed all over Canada. Assuming
there comes a very serious industrial and financial collapse, we will say in
British Columbia, or Nova Scotia—in any of the provinces—or any section of
the country, and your branches in that district realize serious losses on loans
made there, would you absorb those losses out of your contingent fund? Is
that the purpose of the fund—partly?—A. Yes. If we did not have enough
profits from year to year to absorb them, we would absorb them out of the
contingent fund, and in that way at the end of the year there might be a very
serious reduction in our contingent fund, and that might be wrongly construed
by the public. They might say, “ That bank has had serious losses, and it has
weakened its position.’’ I must say, that I can see no possible good to be served
by making public the figures of your inside reserve.
Q. You consider it then, sound banking and sound business principles to
follow, to make provision in what you might call favourable times for shrinkage
and losses in reclaiming bad periods?—A. There can be no question on that
subject.
"0. You also think it is unfair to publish these, because of the comparison,
for instance, of the newer institutions with the contingent funds of perhaps a
[Mr. C. E. Neill.)
1—303
270 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
large and old established institution?—A. I cannot see that any good purpose
would be served by publishing these, and certainly it is safer not to publish
them.
Q. Let me put a final question on that point. What do you say to the
criticism that contingent funds and hidden resources are, speaking from a business
standpoint, immoral or bad and unsound in principle?—A. I cannot conceive
why any one should think they would be unsound or immoral. I think they are
necessary.
Q. And quite sound and proper?—A. Quite.
Q. That is your opinion?—A. Quite.
Q. Then here is another resolution which reads as follows:—
“That the Bank Act be amended to provide that the moneys in the
Circulation Fund shall first be applied to the payment of the notes of a
bank which has suspended payment and that the other assets of the
bank be not applied to the payment of such notes until the moneys in the
said fund are first exhausted.”
In other words, that the profits of the note circulation redemption fund shall
be wholly applied to the redemption of notes of a defunct bank, before its
assets are touched?—A. I do not see why the other banks should be asked to
pay the note liability of the failed bank. That is what it would amount to.
Q. The point raised is this—I am not giving you my opinion; I am putting
the point as it has been argued—that this fund is created for the purpose of the
redemption of these notes?—A. As quickly as possible.
Q. Therefore it should be that fund first applied to for the redemption of
notes?—A. Yes. That is right, I think.
By Mr. Shaw:
Q. It may be only temporary?—A. Yes, but these funds are reimbursed by
the bank again? I don’t think I quite get what is meant by that resolution.
‘Does it mean that the notes will be paid out of the fund, and the fund reim-
bursed by the other banks?
By Hon. Mr. Stevens:
Q. Put it this way. The Home Bank failed, and the contention is that the
note redemption fund should have been applied to the redemption of the Home
Bank notes without an appeal to the assets for that purpose?—-A. Would the
fund be reimbursed out of the assets of the bank?
Q. And then they claim that all of the assets of the bank, provided there is
enough in the fund to redeem the notes, shall be applied to the payment of
depositors?—A. In other words, if there was not enough to pay the depositors,
the bank circulation fund would have to be built up again by the other banks?
I do not see why the other banks should be taxed to pay the note liability of a
failed bank.
By Mr. Irvine:
Q. Then you do not protect your notes?—A. In case there were not enough
assets to pay them—
By Hon. Mr. Stevens:
Q. Let me put it this way: Is the bank circulation redemption fund pro-
vided by the bank to supplement the assets of a bank that has failed, for the
purpose of protecting the note circulation only? That is, if the assets are
exhausted and the notes are not paid?—A. Then the bank has to pay, but not
until the assets are exhausted—perhaps I don’t understand your question. I
know how the fund works.
[Mr. C. E. Neill.]
BANKING AND COMMERCE 271
APPENDIX No. 1
Q. Well, put it in your own words?—A. The notes of a failed bank, if
necessary, are paid out of its funds. Then the fund is reimbursed, eventually
through the recovery on the assets of the bank.
By Mr. Shaw:
Q. Giving notes first priority on the assets of the bank?—A. Yes.
Q. So the real question is, are you going to remove the priority of the notes?
—A. I do not see why you should.
Q. In so far as the circulation and redemption fund is concerned?—A. I do
not see why you should.
| By Mr. Hanson:
Q. If you remove the priority, what effect would it have on the circulation
of bank notes?—A. You would not be satisfied that bank notes were good.
By Mr. Shaw:
Q. But if the fund used in maintaining— A. There is no reason why the
fund should not be used, provided the fund is reimbursed from the assets of the
bank.
By Mr. Hanson:
Q. As a matter of fact, that is a protection—
By Hon Mr. Stevens:
Q. You hold the assets of the bank should be exhausted before the redemp-
tion fund is permanently called upon?
By Mr. Spencer:
Q. And the depositors are called upon to pay?
Mr. Macugean: Or in other words, that the national notes are much better
than the individual circulation. Have you any objection to the substitution of
national notes for your own currency?
The Witness: Yes.
By Mr. Maclean:
Q. Why?—A. Because I think that is a privilege the banks should have
By Mr. Woodsworth:
Q. Mr. Neill, as I understand, you are not opposed to the double liability
| arrangement?—A. No, from the standpoint of the bankers naturally I would like
ie see it removed, but I do not think the bank would make a very strong point
. “OT it.
Q. You are in favour of keeping certain of the operations of the bank within
| the knowledge merely of the Directors?—A. Yes.
} Q. Is it fair to the shareholders to saddle them with the double liability when
_ they are kept in ignorance of certain of the banks’ transactions?—A. I think it
is in the interest of the shareholders to keep them ignorant of certain transactions,
such as I named, the contingent fund, etc.
Q. But is it quite fair to them to expect them to pay double when they are
in ignorance of what may be certain essential facts?—A. That would be for the
shareholders to judge for themselves. Their remedy would be not to buy bank
shares.
Q. But if they buy them, they ought to buy them with the full knowledge
that they would be deprived of the knowledge of certain essential facts?—A. I
think most shareholders know they never get information regarding contingent
funds.
[Mr. C. E. Neill.]
272 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Shaw:
Q. But shares are not sold under that arrangement?—A. No.
By Mr. Woodsworth:
Q. Might I ask you this, Mr. Neill, whether the Bankers Association would
consent to the repealing of the Finance Act?—-A. They would not like it repealed.
The Bankers’ Association, I know, are practically unanimous in the belief that
the Finance Act fills the needs of this country admirably, and they would not
like to see it repealed.
Q. You stated that the Government itself had made a profit of some
$15,000,000 odd?—A. Yes.
Q. That, I take it, would represent the five per cent interest that was
charged?—A. Yes.
Q. If I understood you, you represented that the banks did not profit?—
A. The banks would profit to some extent; the banks have that much extra money
to lend.
Q. They would get eight per cent or ten per cent while the Government only
gets five per cent?—A. They would not get that much. They would make a
small profit over the five per cent, and in some cases they would not make very
much profit. We take advantage of the Finance Act during the crop season
because we have not the money to handle the crop otherwise. Very often we
get six per cent.
Q. If these $15,000,000 representing five per cent on the advances comes to
the Government from just an occasional extra issue, would it not mean that if
the Government issued all currency there would be a very great gain to the
Government?—A. I suppose the Government would make some profit if they
took away the circulating privileges from the banks; they would make a certain
amount of profit.
(). Much greater than $15,000,000?—A. I would say so, yes.
Q. That $15,000,000 of profit is in the extra advances?—A. It would be a
bad thing for the country if the Government did take away the circulating
privileges from the banks.
By Mr. Garland:
Q. Why?—A. It would curtail credit in the first place, because cur loans
would have to be curtailed to that extent, and further we would have to close up
manv of the small branches which we now maintain throughout the country.
The money in the small branch—we keep our reserve in the shape of running
notes—these notes do not become money; they are so much worthless paper until
paid out. If we did not have the circulation privileges, we would have to draw
Dominion notes; we would have to pay real money and we would have to carry
the small branches on real money instead of notes, and to that extent the small
branches would become unprofitable.
By Mr. W. F. Maclean:
Q. It is one of your assets?—A. Certainly, nobody questions that.
By Mr. Woodsworth:
Q. Coming to the question of an inspector, do you think that the audit of
the accounts of the head office would be a sufficient safeguard to the public?—
A. I believe this, that any competent and experienced man can go into the head
office of any bank in Canada, and within a very short time, if he has access to
the figures, to the returns, and to the correspondence and auditors of the bank
and also if qualified and is able to question the different officers of the bank Z
[Mr. C. E. Neill.] :
BANKING AND COMMERCE 273
APPENDIX No. 1
believe that within a very short time that officer can determine absolutely whether
that bank is solvent or not.
Q. Would it require a permanent official attached to each head office?—
A. No.
@. Is it possible for an occasional inspector or auditor to be able to appraise
properly the assets of a bank?—-A. Yes, in my opinion it is; such assets of the
bank as it is necessary to appraise in order to determine the solvency of the
pank. For instance, if an inspector is appraising the assets of a bank he does
not have to take into consideration small or trifling loans; a bank does not fail
through small loans; they fail through big accounts. The Home Bank is an
illustration of that. Any man going into the Home Bank would have discovered
in two hours that the Home Bank was not solvent. If you had had an officer
such as you propose to appoint, an inspector, he could have discovered in one
hour that the Home Bank was not solvent.
Q. In view of the fact that we have a branch system in Canada, there would
be ne difficulty in inspection by reason of the fact that a simultaneous inspection
might not be made?—A. In my opinion, none whatever, and I will tell you the
reason. We all judge these things from our own experience. We have bought
four different banks and the knowledge comes to one. I made an inspection
myself—I do not want to appear egostitical—but within two weeks in each
case, | had determined what the assets of that bank were worth, and in no case
was there any serious mistake made. Further, I contend that any man of
experience—he does not have to be a heaven born banker—any man of experience
can go into any bank and find in a very short time, if he has access to the proper
documents, he can determine whether that bank is solvent or not.
Q. Did you read the amendment which I introduced last year, looking to the
appointment of a Government auditor?—A. I am sure that I did, but it has
escaped me; if you would refresh my memory—
Q. You do not remember whether the Bankers’ Association took any definite
attitude with regard to the amendment last year?—A. I think that the Bankers’
Association as a whole, last year, were not eager to have Government inspection;
but on the other hand, the Bankers’ Association, I think if they feel that the
public demand Government inspection, the majority of bankers would be very
clad to fall in with the wishes of the public and of this Committee. I know
that some of the bankers are opposed to it.
Q. With regard to the Bankers’ Association, what information is given to the
Association of the standing of the various banks in the Association?—A. None
whatever.
Q. What disciplinary powers may the Association exercise over any member
bank?—A. I do not think then can exercise any unless requested to do so by
the Finance Minister; not so far as I know.
Q. In the event of it coming to their knowledge that any bank is in a
rather precarious position, the Association has absolutely no authority to aet?—
A. Not so far as I know. They can put in a curator under the Bank Act.
Q. But before it comes to that point?—A. No.
Q. In regard to the rates of interest, has the Bankers’ Association any
understanding with regard to the rate that will be paid to depositors, on savings
deposits?—A. Yes.
Q. That is understood among the Bankers Association?—A. On savings
deposits, yes.
Q. What about the rates to be charged to borrowers?—A. I think that
in one or two instances there have been rates agreed on for certain classes of
business, but on the whole there is no agreement.
Mr. Hanson: Municipalities.
[Mr. C. E. Neill.]
274 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Wirness: Yes, municipalities. There is a certain class of business on
which we agree on fair rates, but on the whole there is no agreement of any
great importance.
Q. I think I gathered from the evidence given last year, that the banks
had on one or two important occasions decided on the restrictions of loans;
bringing about a certain measure of deflation? Am I correct?—A. The banks
in Canada, so far as I know, have never agreed as a body to restrict loans.
The restriction of loans comes through the head office to each bank. For instance,
if the directors of a bank, on the advice of the general manager and executive
officers decide that it is a good time to curtail loans, they do it themselves
without any reference to any other bank or without consulting them.
Q. There has not been any concerted action?—A. Absolutely none.
Q. If a particular bank or two or three of the leading banks believe from
a study of the general conditions that loans ought to be curtailed, that would
have a very marked effect throughout the entire country—A. It would make
it a little difficult for the borrowers, but I do not think that the banks ever
pressed borrowers unduly.
Q. It would further have a direct relationship to the price of commodi-
ties at large, would it not?—A. I would not think so.
Q. You have not given thought to that?—A. I have given a lot of thought
to it, but I do not think there would be.
Q. Do you not think that there is a direct relationship between inflation
and deflation and the price level?—A. Oh yes, but so far as Canada is con-
cerned I do not think we have been face to face with such a situation as that.
Q. What has brought about the general ups and downs in general prices?
A. You probably know that as well as I do.
Q. It does not come by accident?—A. I suppose that the inflation of cur-
rency must increase the price of commodities; that is a generally accepted
principle that applies, not only in Canada, but all over the world.
Q. That is quite true; all I am suggesting is that there is a general economic
law that the banks can by causing a deflation or inflation affect the price level?
—A. If they take any drastic measures, it is possible; but so far as I know, the
banks have nothing to do, or the restricting of loans has nothing to do with
the inflation or deflation.
By Mr. Shaw:
Q. Has it had nothing to do with the price level in the United States?—
A. I think probably it had, but I do not know whether it had or not. As you
know, the Federal Reserve Banks deflated very rapidly and were very seriously
criticised for deflating rapidly and causing much hardship.
Q. Has it an effect on business here?—A. I think so; every business move-
ment in the United States is reflected here to a certain extent.
By Mr. Woodsworth:
oy Bank notes are generally guaranteed under the existing arrangement?
—A. Yes.
Q. Then why should deposits not also be guaranteed?—A. Well, bank notes
are a medium of circulation, and it would not be wise to have any doubt in
any one’s mind as to their safety. The question of guaranteeing bank notes
or having them absolutely safe is quite different from the question of guar-
anteeing deposits.
By Mr. Coote:
Q. Could a bank carry on business without deposits?—A. No, it would
have nothing to loan except its capital.
Q. Could it do without its own notes?—A. Certainly.
(Mr. C. E. Neill.J
BANKING AND COMMERCE 275
APPENDIX No. 1
By Mr. Woodsworth:
Q. The custody and management of the central gold reserve are to-day
in the hands of the Bankers’ Association?—-A. Under trustees appointed by the
Government; the Royal Trust Company, the Bank of Montreal, the Canadian
Bank of Commerce, and the Royal Bank of Canada.
Q. That practically gives control over the gold reserve?—A. Yes. The
trustees are appointed by the Government.
Q. ae trustees have full control?—A. I do not know what you mean by full
control?
Q. As trustees?—A. They control the money that is in there.
Q. There is no particular reason why the Treasury Department itself should
not control this reserve?—A. I do not think so, it is a matter of convenience
to have it under a real trust; it is a matter of convenience.
Q. We have there the nucleus of a central reserve bank, have we not?—A.
I would not admit that.
Q. The question has been raised that if the Government should really carry
out a systematic audit, it would mean that the Government practically guaran-
tees the banks, would that be a fact?—A. I do not think so. I have no feeling
of that kind at all. I do not see why the Government should be responsible
if they examine a bank any more than the Government of the United States
is responsible for Government examinations there.
Q. With regard to this question of publicity: If it is desirable in the
interests of the shareholders and the public generally that a certain measure of
secrecy should be maintained; that certain information should be confidential
in its character, it throws a great responsibility upon the directors. Is there
any way of holding the directors responsible?—A. You mean responsible for
losses to depositors?
Q. Yes, for losses to depositors?—A. If you did that you would not get
any bank directors.
Q. I am looking at the thing practically. We are facing it under the
reference to this Committee. There were certain losses to depositors and
shareholders of the Home Bank. Now, one of the reasons why these losses, I
take it, occurred, is that this information was confidential and private through
the years, and the shareholders and depositors had no way of obtaining the
information?—A. If the directors of any bank are criminally responsible, or
make false statements, or wilfully give wrong information to the government,
I see no reason why they should not be held responsible.
Q. Not merely the false statements, but the very fact that they hold
confidential some of the essential facts in the case, placing a _ responsibility
upon them?—A. Because they did not disclose their secret reserves?
Q. Yes?—A. That is no great responsibility.
_ Q. If they withheld any material facts?—A. As: far as I know there were
no material facts
Q. In the case of the Home Bank there were these tremendous investments,
which were no good?—A. If the directors of the Home Bank realized these
assets were worthless and put that in their statement knowingly, saying they
were of value, then they must be responsible.
Q. I will go one step farther than that. If the shareholders and the public
‘are denied the knowledge of essential facts, is there not responsibility upon the
directors, even though the directors may believe that they are making a correct
statement?—-A. I think a director of a bank is acting in good faith and fulfill-
ing his obligations to the best of his ability, if he is deceived, I think it would
be a very hard thing to make that man responsible—if he has carried out his
obligations properly.
(Mr. C. E. Neill.)
276 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And the shareholders and depositors in such cases must carry the
burden without any recourse?—-A. Always provided that the director does his
duty; if he does not, he must suffer.
By Mr. Cahill:
Q. Mr. Neill, on that point of secret reserves. Who administers secret
reserves? Are the directors all aware of the secret reserves?—A. Yes.
Q. And the shareholders’ inspector or the shareholders’ auditor has access
to the secret reserves?—A. He knows what they are, yes; he must know.
Q. Does he investigate them?—A. Perhaps. If you will permit me, I will
say that a contingent fund is a fund set up in a bank that is available to take
care of bad debts in case of need; it is Just a heading opened up in the general
ledger.
By Mr. Hanson:
Q. What form does it take?—A. It takes no form; it might be $20,000,000
or $50,000,000—of course, I am speaking in absurd amounts—but it is an
amount that is kept in the books, and that is available, and it is invested in the
general assets of the bank.
By Mr. Maclean:
Q. And any claim written off goes in there?—A. Yes.
By Mr. Cahill:
Q. And it is subject to the investigation of the shareholders’ auditors?—
A, ves,
Q. And would be under government inspection?—A. Yes.
By Mr. Irvine:
Q. Just a few questions arising out of the examination by Mr. Woodsworth
and Mr. Good, which I did not get quite clearly. I understand, Mr. Neill, that
you disclaim any power on the part of the Bankers’ Association to control credit
im respect to inflation and deflation?—A. That is so.
Q. Would you say that it is better that it should not be controlled—that
we have an uncontrolled credit system?—A. I would say so.
Q. Just left any way it wants to be?—A. The bankers, as bankers, must
exercise their intelligence.
Q. And of course, how can they exercise intelligence if they do not control
it?—A. Each bank controls its own loans.
Q. No, each bank controls its credit?—A. Yes.
Q. You were saying they did not control it as regards the credit of the
nation?—-A. As an association?
Q. Don’t you think that somebody ought to do that?—A. To control the
credit loans of the banks?
Q. Control the whole credit of the nation—in respect to the nation’s
business ?—-A. I do not think it is necessary.
Q. You think it would not be wise?—A. I think it would not be wise.
Q. I think you also said that if the government issued all the currency of the
country, that would result in a curtailment of credit?—A. Yes, to some extent.
Q. It was not clear to me how that would happen. Supposing I put the
proposition to you; how many bank notes are in circulation in Canada at the
present time?—A. I can’t tell you that; it appears in the Government statements
every month. Notes in circulation at the end of March $170,850,000.
Q. Supposing that the Government should issue in addition to its own
notes, $170,000,000 and distribute them exactly as they are now distributed.
In what way would that curtail credit?—A. Of that $170,000,000, you must
[Mr. C. E. Neill.]
BANKING AND COMMERCE 277
APPENDIX No. 1
understand that a portion of it is secured by deposits in the Central Gold
Reserve. Let me see how much has to be subtracted from the Central Gold
Reserve? $61,000,000 is represented by deposits in the Central Gold Reserve.
Therefore, that really represents Dominion Government circulation of $110,000,-
000—that would be the net amount.
Q. The point is if the Government issues notes—note for note—with the
as notes which I presume have collateral behind them to be issued on.—
A. Yes.
Q. If the Government issues note for note, in what way would the fact that
the Government issues currency curtail credit?—A. Because the banks now have
$110,000,000 of their promises to pay outstanding, and they would have to
redeem those and buy an equal amount from the Government.
Q. But if they bought an equal amount from the Government would you
still have the same amount for doing business with?—-A. Instead of having
$110,000,000, we would have used that up to buy the Government notes.
Q. Could not the Government issue to you $110,000,000 of its own notes
on the collateral that you use to issue your notes on?—A. Mr. Irvine, we have
a circulation up to $110,000,000; therefore, this means that we have that amount
of our promises to pay, secured by the general assets of the bank. If we have
to redeem those notes, we would not have them to loan.
Q. I do not quite get that point—A. It is a special privilege.
Q. But surely if the Government can extend special privileges to the banks,
it can use that same special privilege for itself?—A. If you do not see my point,
T do not think I could make it clearer to you.
By Hon. Mr. Stevens:
Q. Let the witness repeat his statement in regard to the currency being kept
in the bank vaults—A. It would come in that way.
By Mr. Hanson:
Q. You would have to pay the Government notes.—A. In addition to the
notes we would have in actual circulation we would have to get other notes, and
hold. them at our branches to take care of our business.
By Mr. Irvine:
Q. Perhaps we can go through the situation, as regards getting this privilege.
You take your bank collateral and present it to the Treasury Board?—A. On
our regular circulation, no.
Q. Can you circulate—A. For advances under the Finance Act—no, we can
only circulate notes up to the extent of our fully paid-up capital.
By Mr. Maclean:
Q. And that is a privilege?—A. That is a privilege, and in certain seasons
of the year, from the lst of September up until February, we have the further
privilege of issuing to the extent of 15 per cent above our paid-up capital, but
we have to pay 5 per cent interest. That is to take care of the crops.
By Mr. Irvine:
Q. But if Government notes were issued to you to the full extent of your
paid-up capital, in what way would that curtail credit?—A. If we did not have
to pay for them, it would be the same thing.
By Mr. Coote:
Q. But if you had to pay interest on that, Mr. Neili— A. It would depend
on the rate of interest, Mr. Coote.
Mr. MacuEan: It might be 24 per cent, or it might be anything.
The Wirness: They had to put up government bonds in the United States,
[Mr. C. E. Neill.]
278 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Irvine:
Q. Do you say that the disparity between the capital of the banks and the
liabilities of the banks did not constitute any appreciable danger?—A. I don’t
think so, at the present time.
Q. Are we to infer from that answer that capital is more or less incidental
to banking?—A. Not at all.
Q. If there is no ratio between the bank’s capital and its liabilities, what
is the use of the capital?—A. I think there is a ratio, but I think in Canada we
are still on the safe side, considerably below the ratio in England.
Q. What is the safe side? —A. I do not think I am sufficiently well informed
as to that. You can judge that as well as I can.
Q. Don’t you think every man in Canada ought to know that?--A. We
are on the safe side.
Q. I have no doubt you are on the safe side—A. I think when we get to
the danger point we will take care of that.
By Mr. Woodsworth:
Q. How do you know that? You see some of us are ignorant of that. How
do you know that?—A. I am certain that we are well below the ratio that
obtains in England, for instance.
By Mr. Irvine:
Q. But England is not safe?—A. How can you judge these things?
Q. That is a point I want to get at—A. I do not know whether there is
any hard and fast rule for judging these things.
Q. If you say there ought to be a ratio, I would like to know what it is?—
A. I cannot tell you that.
Q. You cannot tell us?—A. No.
Q. I think you said you have not given any consideration to the proposi-
tion of Mr. Ladner’s proposal regarding the insuring of deposits?—A. No,
because I was never quite satisfied as to what Mr. Ladner’s proposition was.
Q. You thought it would not be advisable?—A. That is my personal feel-
ing, yes.
Q. Would you be willing to study it—we don’t know whether it will work
or not?—A. I will be very glad to.
Q. Would you be kind enough to call the Bankers’ Association together
immediately and receive Mr. Ladner’s proposition, and report to this Commit-
tee upon it?—A. If Mr. Ladner will make his proposition in concise shape and
in a practical way, and give it to me as the acting head of the association, I
will tell the members of the association that we have got it, and this Committee
has asked us to meet and give them our views.
Q. That is all I want, because there may not be anything in Mr. Ladner’s
proposition, but I would like to know if there is.
The CHaiRMAN: In respect to that, it might be well to ask Mr. Neill if he
requires anything additional in order to put Mr. Ladner’s- proposition in con-
crete form—in addition to what is shown on the order paper.
By Mr. Irvine:
Q. You have heard the question of the Chairman?—A. I find it very diffi-
cult, so far as I am concerned, to establish a fund somewhat similar to the bank
circulation redemption fund, to insure deposits. I find it very difficult to deter-
mine, in my own mind, how that could be done, or on what basis you would
assess the banks.
Q. I think your objection, as stated, to the proposition, was that it had not
worked out in the United States?—A. Guaranteeing of deposits did not, no.
[Mr, C. E. Neill.]
BANKING AND COMMERCE 279
APPENDIX No. 14
Q. Do you know of the pamphlet issued this year by the Bankers’ Associa-
tion and distributed to the members of Parliament?—A. Yes.
Q. Did you write it?—A. No.
Q. Do you know who wrote it?
The CuHatrMan: Is it wise to ask that question?
Mr. Irvine: I think it is very wise.
The Wirness: I think I know who wrote it, but I am not sure enough to
say. I did not see him do it.
By Mr. Irvine:
Q. Would you care to say who you think wrote it?—A. I would like to ask
Mr. Ross about that! (To Mr. Ross): Do you know who wrote it?
Mr. Ross: It is a composite thing.
!
By Mr. Irvine:
Q. Is it a syncopated product of all the bankers’ intelligence, of Canada?
—A. Yes, I think so.
Q. Are you aware that in that pamphlet it is very definitely made clear
that there is no comparison between the Canadian banking system and the
banking system in the United States?—-A. No comparison of them?
Q. Yes. The heading in the systems are incomparable?—A. I think it is
very difficult to compare them.
Q. If they are not comparable, then what happens in the United States
with regard to an insurance scheme would not necessarily happen in Canada?
—A. I would not go that far. It is generally conceded that the principle of
guaranteeing deposits is unsound. It does not make any difference the size
of the banks. It is unsound as a financial principle.
Q. I do not think it would be wise to say it is conceded everywhere. I
think it has been made clear by the witness that it might be detrimental to the
safety of a bank if publicity were given to the condition of the bank at certain
times?—A. I only said that with reference to contingent funds, I think.
Q. I gathered from your answer to a certain question that if a bank were
in difficulties and those difficulties were made known to the public, it would
likely increase its difficulties?—A. I think so.
a You also said that insurance would lead perhaps to reckless banking?—
A. Yes.
Q. Do you not think that keeping things quiet, the fact that a banker knows
that his investment will not be made public, might also lead to reckless banking?
—A. I do not think so; I do not think you can compare these two cases. The
loans that banks make are not disclosed to the shareholders.
Q. But do you not think that if, say, a shareholder was about to borrow
a couple of million dollars to enter into a doubtful investment, and he knew
that that would be public to-morrow morning, in the front page of the news-
papers, might he not consider twice before he did it?—A. He would be a very
strange banker who would loan $2,000,000 on a doubtful investment.
Q. They have been doing it; we are gathering up the fragments of a similar
case, and we do not know how many more are doing it.—A. Is it your suggestion
that every bank shall make public all its loans?
Q. My question was, do you not think that the fact that the condition
of a bank was kept from the public would have a tendency to make reckless
bankers?—A. No, because I do not see how you could make the full condition
of a bank known to the public. The only way you could do that would be
to publish a list of the bank’s entire assets and everything it owned, and all
its loans.
(Mr. C. E. Neill.]
280 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Garland:
Q. That might be a good thing?—A. I do not think it would be a good
thing.
By Mr. Maclean:
Q. You said that you could go into a bank and in two weeks have a very
good knowledge of that bank’s position?—A. Yes.
Q. And that being the case, if you had had an opportunity to go into say,
the Merchants Bank, which was performing a splendid service for this country,
and could have made an examination, the bank might have been saved? Now
then, granting that an inspection of two weeks would show the condition of a
bank, and my friend Mr. Stevens here says he is in favour of bank inspection —
all I want to know is, should not that bank inspection automatically take place,
and not be the function of the Minister of Finance of this country?
Mr. Hanson: At his discretion?
By Mr. Maclean:
Q. And should it not be imperative that some high-class official of the
description you have given, be employed, rather than this work being done as
a political function?—A. If you have government inspection, I would say the
way you suggest is the way to do it.
By Mr. Shaw:
Q. Are you familiar with the inspection system in the United States, Mr.
Neill?—A. No.
Q. Are you familiar with the operation of the Comptroller of the Currency,
in his relationship to examinations, and in his relationship to the operation of
the Federal Reserve System?—A. No, not sufficiently to discuss it.
Q. Well then, let me ask you if you will agree to this; that any inspection
imposed by the Government must be an independent inspection?—A. Yes —
what do you mean by “ independent ’’?
Q. I mean it must be done by independent authority, responsible to and
paid for by the Government?—A. Yes.
By the Chairman:
Q. Independent of the bank?—A. Yes.
By Mr. Shaw:
Q. And our efforts must be directed to working out some scheme to give the
fullest possible efficient consideration with the means we have at our disposal?
—A. Yes.
Q. Have you read any of the evidence of the Home Bank case?—A. I have
read parts of it.
Q. Has it struck you, Mr. Neill, as a reader of that evidence, that it is a
most amazing thing that all this information was available with regard to the
position of this bank, was in the hands of the directors, was apparently in the
hands of the Minister of Finance—probably two or three Ministers of Finance,
and rumoured, as you suggested, among the bankers—yet not a single depositor
through the whole course of the seven or eight years heard one single word, and
was unable to protect himself. Is that not an amazing situation?
Mr. Hanson: The Government of New Brunswick heard of it.
Witness: I think that some depositors, some people, had heard that the
Home Bank was not particularly strong.
Q. And they got their money out?—A. Yes.
[Mr. C. E. Neill.)
BANKING AND COMMERCE 281
APPENDIX No. 4
Q. Is that not a sad commentary upon the situation to-day when that con-
dition can exist?—-A. Certainly, the Home Bank is a sad commentary.
Q. On the Bank Act I would say too?—A. No, the difficulty with the Home
Bank was that they did not have proper auditors.
Mr. W. F. Macuean: Or Government inspection.
Mr. Hanson: They did not have any internal inspection.
By Mr. Shaw:
Q. Are you satisfied with this system of rotation of auditors?—A. I think
it works very well.
Q. Do you think it necessarily makes for safety, to change an experienced
auditor for another one not experienced?—A. It is a step in the right direction.
I would not say it is infallible, but it is certainly a step in the right direction.
Q. I do not understand why you say it is a step in the right direction when
you must remove an auditor who has experience in the operation of the law and
substitute some one else who is not experienced.—A. It is because two heads are
better than one and three heads are better than two.
Q. You put on the one hand experience in the bank’s affairs as against a
possibility of dishonesty? Is that not what it is—or collusion?—A. Or bad
judgment.
Q. But the bad judgment may exist any way?—A. But you are less likely
to have bad judgment if you have three minds working rather than one.
Q. Are you in favour—probably I had better predicate my question by
asking this: What can the Minister of Finance do in the event of his finding that
a bank was in a very bad condition, after the investigation under Section
56 (a) ?—A. He can either close the bank or go to the Canadian Bankers’ Asso-
ciation and seek their advice as to what should be done.
Q. How would he close the bank?—A. Have a curator appointed under the
Bank Act; he can get the directors to appoint a curator.
Q. But suppose he had a lot of refractory directors to deal with and they
said, ‘‘ No, we will not close the bank,” is it not so that there is only one test,
that a bank closes its doors when it fails to meet its obligations that have
matured, just the same as in any other solvent institution?—A. I think so.
Q. In these circumstances, the Minister of Finance has no power under the
Bank Act to close a bank; is that not so?
Mr. Ross: He can bring pressure upon the directors and say to them, ‘“ We
will prosecute you; we will take out an information against you.” He can soon
make them close their bank.
Witness: Do you not think that if the Minister wanted to close a bank,
he could close it?
Q. Are you in favour of giving him the power?—A. Yes.
Mr. Suaw: Iam. I wish the Minister of Finance were here to get this too.
By Mr. Shaw:
Q. The next thing I want to ask you is, in the United States the comptroller
of the Treasury, when he finds that the capital of a bank has been impaired,
can call immediately upon the shareholders to renew the bank capital, and that
is credited against their double liability. Would you be in favour of such power
as that being given to the Minister of Finance, or to his proper officer?—A. I do
not know; I have not considered that point. I do not think that it is perhaps
very likely.
[Mr. C. E. Neill.J
282 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. We have a Finance Act under which, as you have suggested, there is the
power to discount securities of a certain character and to fix the rate of interest?
—A. I think the rate of interest is variable.
Q. The maximum is fixed, I think?—A. No.
2 Q. Or probably it is the minimum?—A. I do not think that any rate
is fixed.
Q. But as a matter of practice, it has always been at the rate of 5 per cent?
It has never varied?—A. Not recently.
Q. Has it varied at all?—A. It varied during the War on a certain class of
securities.
Q. But during the period from the end of the War to the present it has
not varied at all?—A. No.
Q. Now that, of course, is administered by the Treasury Board—that
Finance Act?—A. Yes.
Q. And the Treasury Board, as you know, consists of the Minister of Fin-
ance, the Deputy Minister of Fimance as secretary, and I think four or five other
Ministers of the Crown?—A. Yes.
Q. That is what I would call a political body, is it not?—A. Yes.
Q. Would you say that all of those gentlemen are experienced bankers?—A.
Not likely to be.
Q. And under our system it is not likely they ever will be?—A. I should
not think they would be experienced bankers, no.
Q. I want to get clearly in my mind what happens. We will suppose you,
representing the Royal Bank, go to the Treasury Board and say, ‘Here are may
securities; I want a certain amount of money at 5 per cent,” and they say,
“Very well, Mr. Neill, we will let you have it”; they issue to you Dominion
notes, do they not?—A. Yes.
Q. What do you do with those Dominion notes?—A. We use them to make
loans with.
Q. But you do not want to circulate Dominion notes?—A. We put them
in our Gold Reserve, and use our own notes.
Q. That is one method of increasing your own circulation?—A. That is one
method of increasing our own circulation, but the increase is backed by Domin-
ion notes.
Q. Quite right. The situation is that the Dominion notes are in the Central
Gold Reserve?—A. Yes.
Q. And as security against them you issue your bank notes which go out,
and quite properly bring in a rate of interest?—A. Yes, say 6 per cent, and we
pay the Government 5 per cent.
Q. So it pays you, under the circumstances, to issue your own notes? If
it did not pay, you would not use them?—A. Unless we needed the money.
Q. What I want to get at is this. This reserve is under the control of four
trustees, is 1t not?—-A. Yes.
Q. And then the Finance Act is under this Treasury Board. We also have
in addition to that the returns made by the Bank to the Minister of Finance
monthly or yearly. You know about that, of course?—A. Yes.
Q. And those go to officials of the Department, not skilled officials at all.
I mean it is merely an adding machine requirement of the Minister of Finance
as far as we know?—A. I would not say they were unskilled officials.
Q. They are not experienced bankers, anyway?—A. No, they are not
experienced bankers.
Q. And what they do is to tabulate, just the same as an adding machine,
and send this information to the public in the Canada Gazette, etc.2—A. Yes,
[Mr. C. E. Neill.)
BANKING AND COMMERCE 283
APPENDIX No. 4
Q. And as a matter of fact, as far as these statements being sent to the
Minister of Finance, these finance officials have never discovered their falsity,
that is true?—A. Yes.
Q. We are going to set up another Department, and we will have an
inspector, according to the Minister of Finance, appointed by the Finance Depart-
ment, that is, the Minister of Finance, and I call your attention, Mr. Neill, to
this, and ask your consideration of it. We have here the Finance Act operating
under one Board; the Central Gold Reserve under another, we have inspection
under another, and the Finance Department receiving returns from the banks,
which they gather together and issue to the public, and we have, as suggested
by Mr. Maclean, a Mint under the authority of the English Government. Does
that look to you like a centralized system of banking?—-A. It is very workable.
Q. This machinery works, but it does not always work intelligently ?—A.
That machinery will work to advantage, in my opinion.
Q. I will suggest, if we had some sort of a central bank bureau, I do not
care what you call it; composed of three experienced financial experts who had
control of the whole system, including a system so they could relate imspection
to the operation, now going on under the Finance Act, and under the Central
Gold Reserve, you would probably have a very much more efficient and safe
system. What would you say about that?—A. It is conceivable you would,
but in my opinion, Mr. Shaw, you can have a thorough and proper inspection
of the bank by having a competent official as inspector go into the different
banks each year, as I have suggested.
Q. But do you think, Mr. Neill, that system of inspection should be related
to the system of discounting?—A. It would be to a certain extent in this way,
if the Minister is called upon, and is undecided as to the goodness of the
securities, or the soundness of the bank, the natural thing to do will be to
call in these inspectors for advice.
Q. As you say, the Minister of Finance under our system is not necessarily
a financial expert; we are not going to rely on his judgment; we want to get
a competent financial man?—A. The Minister should have no trouble at all.
The collateral provided under the Finance Act is set forth. There can be no diffi-
culty in the case of Government or municipal bonds or securities of that kind.
The only question that could probably arise would be in regard to commercial
paper. If the Minister is undecided as to the value of that commercial paper,
he can call on the trustees of the Central Gold Reserve for an expression of
opinion, and he could not get any more qualified people to pass on the value of
collateral than the trustees because these four trustees, or three of them are the
heads of three of the largest banks in Canada.
Q. But they might be interested in this particular transaction?—A. I can
hardly conceive that any general manager of any bank would be interested or
that he would ask the Minister to make improper advances.
Q. He might be the very man who was asking for the advances?—A. Then
his opinion would not be asked. If the Royal Bank were asking for advances
in trade paper and the Minister was not satisfied to make those advances, he
would call in the three other trustees of the Gold Reserve, Mr. H. B. Mackenzie,
General Manager of the Royal Trust Company; the general manager of the
Bank of Montreal, and the general manager of the Bank of Commerce, and he
would ask these three officials to value the collateral and he could have the
views of the inspector. He would be perfectly safe in doing that.
Q. I take it that you are thoroughly satisfied with the system as it exists
with the exception of an added inspection?—A. Under the Finance Act?
Q. Yes. You do not ask for any further co-ordination than now exists?—
A. No.
io [Mr. C. E. Neill.J
284 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Do you know a gentleman of the name of Mr. Pease?—A. Yes.
Q. He has studied the Federal Reserve System very thoroughly ?—A. Yes.
Q. In his statement to the shareholders in 1918 he pointed out that the time
was practically rife for the adoption of the same methods employed under the
American Federal Reserve System to the Canadian system?—A. Mr. Pease had
very strong views on that, but I do not think that at that time it was proposed
that the Finance Act should be extended. The Finance Act was a war measure
and was automatically to come to an end after the declaration of peace. Then
the Minister, after considering the matter carefully, decided to make the Finance
Act permanent in order to provide rediscount facilities for the banks. Probably
when Mr. Pease made that statement—I do not know what his views are to-day
—he had no idea that the Finance Act was going to be continued. Rediscounting
privileges are in my opinion rather essential.
Q. Have you ever considered the advisability of extending the scope of the
Finance Act so that a provincial government might come here for instance, and
pledge its security for the purpose of using the money secured for rural credit
purposes?—A. The provincial government would have to apply to a bank first
for a loan and put up its bonds as security, and the bank would have to apply
to the Government.
Q. No, let us change the Act so that the provincial government could come
direct to the Treasury Board the same as you do. Why should they have to ga
to a bank?—A. That is a point I have never considered, and I would not like
to give an opinion.
. Well, you see, I hoped when you came before the Committee that you
would consider all the problems, so that you could enlighten us.
Mr, Hraty: I was going to ask a few questions in regard to the Home Bank
situation, 1f the Committee can wait a few minutes.
Q. You have not studied the evidence that has been given before the
Cominissioner, Mr. Neill?—A. No.
Q. But you know the situation pretty thoroughly?—A. Yes.
Q. And the cause of the failure?—A. Yes.
Q. In 1916 it was stated that had the bank closed, the depositors would
have been saved in the neighborhood of $79,000,000. Do you think that is
reasonably correct?—A. I do not know the condition of the bank in 1916, compared
with what it was when it failed, but it is conceivable that the bank did get
in a worse position in the space of time between 1916 and 1924.
Q. Would you say it should have been closed in 1916, in your opinion?—
A. Well, that depends a great deal on the situation at that time. You know
what the reason was—that the Finance Minister gave—why he did not close it—
Q. Just a minute; what was that reason?—A. As I understand it, it was a
matter of expediency.
Q. It was so that a financial crisis might be saved?—A. It might have
arisen if the bank had been closed at that time.
Q Is that your opinion now?—A. I have no opinion whether it would or
not.
Q. I am asking you now, as the leading expert of Canada?—A. I regret
I cannot accept that honour.
. You knew the circumstances in 1916?—A. It is quite conceivable that a
crisis would have arisen.
Q. And had a crisis arisen, who would have been the first sufferers
financially? Is there not only one answer to that—the chartered banks ?—A
Some of them might have been. -Ghiy
Q. All of them, if the crisis had been severe enough?—A. No, I don’t think
so. Some of them might have been, but not all of them.
(Mr. C. E. Neill.]
ee
BANKING AND COMMERCE 285
APPENDIX No. 1
Q. I do not wish to get into an argument about the withdrawals of deposits,
but if a crisis had been large enough, they would all have been crippled?—A.
cannot conceive of any crisis sufficiently bad to cause that situation.
Q. Is that not what the Minister of Finance had in mind?—A. He thought
an unfortunate situation might arise. I do not know how far he thought it
might extend. ‘
Q. When was the first appeal made to the Bankers’ Association to come to
the help of the Home Bank?—A. I cannot say, because the first I knew of it was
when ! was telephoned, and I think then the bank had practically failed.
Q. That was the appeal made just before it was closed?—A. All I know was
that I was telephoned to that the Home Bank was in extremis and nothing
could be done to prevent it failing. I think they had closed the doors then.
@. Did bankers generally know the condition of the Home Bank a year or
two previously?—A. Not definitely; they may have suspected it was not in
good shape, but I do not think any of them thought it was in as bad a shape as it
was.
Q. Has any method been considered by the Bankers’ Association of re-
imbursing the depositors of the Home Bank or helping to reimburse them?—
A. Certain people have been going to the Bankers’ Association and asking them
if they would not agree to repay depositors, but we said we could not see our way
clear to do that, because we did not think we would be justified in doing that
from the standpoint of our shareholders.
Q. And do you think, in view of the opinion of the Finance Minister, and the
opinion you have partially agreed to, that if the bank had closed in 1916, many
of the depositors would not have suffered as they have, that somebody should
reimburse these depositors?—A. I would not care to answer that question.
Q. You are an expert here before this Committee, and I want your opinion
on that?—-A. As far as our banks’ are concerned, I am only interested in the
banks—I do not think the banks should be expected to reimburse them?
Q. Or help to?—A. Or help to, speaking for the banks.
Q. They were sacrificed for the benefit of some—We want your expert
opinion on that, Mr. Neill?—A. My view of the Home Bank situation would be
of no value to you.
Q. Yes, because many of us are trying to insist that these people should be
reimbursed.—A. The only expert opinion I could give you is that the banks
cannot be expected to reimburse. There is no reason why they should be.
Q. There is a difference of opinion on that?—-A. There may be a difference
of opinion, but you asked me for my opinion. Speaking for my own bank, we
do not feel that we benefited any by the action of the Finance Minister in with-
holding action.
Q. I was going to ask one general question. Why is not the Canadian dollar
on a gold basis to-day?—A. Ask the Finance Minister.
Q. Is it up to the Finance Minister?—A. Up to the Parliament of Canada.
Q. Are you of the opinion it is on a gold basis?—A. Yes.
Q. Or it could be?—A. Yes, it could.
By Mr. Hanson:
Q. And should be?—A. And should be. It is up to the Parliament of
Canada. They can put it on a gold basis.
By Mr. Spencer:
Q. How can that be done?—A. There is a prohibition on the export of gold.
Remove that prohibition and let the Government pay gold on demand for its
legal tender.
[Mr. C. E. Neill.]
1—31}
286 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Shaw:
Q. Have you read Mr. Keynes’ book?—A. No.
The witness retired.
The Committee adjourned.
AFTERNOON SESSION
The Select Standing Committee on Banking and Commerce resumed at 4
o’clock p.m., Mr. Vien, the Chairman, presiding.
Doctor H. M. Tory recalled.
By the Chairman:
Q. Doctor Tory, are you ready to make any further statement to the
committee in respect of the rural credits?7—A. Mr. Chairman, may I answer
a question that has been suggested to me, that I look at page 787 of last year’s
report, and give you an opinion on that. My opinion does not differ materially
from what Professor Swanson says. Without question, there are a good many
people in difficulties who would have trouble in presenting a proper security for
loans. On the other hand there are a great many people who would have no
trouble in presenting security, whose lands, properties, are in an advanced state
of development, and who would be able to present substantial security. I am
quite sure of that. I might illustrate that by saying that I inquired of one of the
large loan company inspectors in Edmonton, and he told me that they had in a
certain district with Edmonton as the centre loans out to the extent of approxim-
ately two million dollars, and there was only one questionable loan in the lot.
That would be a district that would probably be specially advanced. They were
having no anxiety about their loans in that district at all. He said if we were
to go outside of that area, further north, where the land is less cultivated, or
where the land is not quite so good, we would find a great many people in
difficulty. I was not able to get any figures that would give me any indication
of the ratios of the numbers of persons who were in very great difficulty. I had
hoped to make a survey of certain districts but it was impossible to do so. I
think perhaps that is sufficient on that point.
Q. In a word, the system would be created for the relief of those who can
offer security, and the relief would be mainly that an amortization plan would
be introduced which, by the fact that the rate of interest would be lower, would
allow them by what they would save, to amortize the amount?—-A. That is the
scheme that has been put into operation almost everywhere. That is the idea
we have. Then there is another question.
Q. There will be, however, a certain number, which cannot be ascertained,
who will be unable to profit by the system on account of the lack of security?
—A. They will be unable to give the kind of security this scheme demands.
They will have to be treated in some other way. I see on looking through my
evidence yesterday that I made one slip; I said that the rate of interest for the
intermediate banks was the same as for the land banks. That is not quite
correct. The rate at which bonds are sold by the land banks is a maximum of
5 per cent, so the interest rate there is at a maximum of 6 per cent. In the
intermediate banks they are allowed to sell bonds at a maximum of 6 per cent,
which with 1 per cent, would make a maximum of interest for the intermediate
banks at 7 per cent. Someone asked me if the rates were the same, and I said
“Yes,” without thinking of the difference between the two. ’
Now, Mr. Chairman, the question that was asked—and I judge by the
fact that no one has started asking questions about it, that you are expecting
me to answer the question of what I would recommend in the way of immediate
relief—I recognize that that is asking a very definite and serious question, and
IMr. C. E. Neill.)
BANKING AND COMMERCE 287
APPENDIX No. 1
I confess that I had not thought originally that such a pointed question would
be put to me. I have thought over it very seriously since last day, looking over
all the aspects of it as I have observed them in Canada and the United States,
and I have come to these conclusions. I am going to make a few brief state-
ments of the conclusions before I suggest the emergency remedy.
By Mr. MacLean:
Q. By emergency, you mean something to be done this year?—A. Yes,
that is the word we used last day, to carry on during the time of further study
and discussion of the subject. I have come to these conclusions, first, that the
Farm Loan Board principle is sound, absolutely sound.
By Mr. Spencer:
Q. What do you mean by the Farm Loan Board?—A. I am speaking now
in the terms of United States practice, that the Farm Loan Board principle as
worked out in America
By Mr. MacLean:
Q. And backed by the Government?—A. I will come to that in a moment
—is sound in principle and could be operated in Canada. I am convinced of
that. Secondly, that it would require government help by capitalizing it, and
I believe that that is also sound. I think American experience shows that the
government can safely, without fear of loss, undertake the capitalization of a
farm loan scheme. I have serious doubts of the soundness of direct government
loans as applied to Canada.
By Mr. MacLean:
Q. Applied to a Farm Loan Board System?—A. No, in a government doing
business by direct government loans. I have very serious doubts about that,
and my reasons are, the danger of the lack of initiative on the part of the
persons who borrow directly from governments; the danger of political inter-
ference in the administration of it, of which there is a genuine danger, and the
fear of a lack of a sense of responsibility that many people have in borrowing
directly from the government. I am giving to you candidly the results of my
thinking, since last day. I do not say that it is not sound, but I say that
certainly I have very serious doubts about the soundness of any federal scheme
involving direct government loans. Then I go further and say that the
establishment—if I am correct in that, then the establishment—if I am correct
in my original statement, we should aim at the establishment of a national Farm
Loan Board for the purpose of supervising and controlling a bank or banks
which would absorb or act through the present local government organizations.
By Mr. Garland:
Q. The local co-operative organizations?—A. I am speaking now of the
local government organizations. .
By Mr. Good:
Q. Provincial?—A. The provincial government organizations, that any
scheme we put into operation should absorb the present organizations that exist
in the several provinces.
By Hon. Mr. Stevens:
Q. Not duplicating their work?—A. Not duplicating their work.
[DE Au. pM: eory.)
288 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Garland:
Q. Do you include the banks?—A. No, I am speaking now of the govern-
ment organizations.
By Mr. MacLean:
Q. Is there any danger of political interference in these provincial
organizations now?—A. I would prefer not to answer that question, Mr. Mac-
Lean. The history of these organizations, some of it is not a very happy
history, as I think those of us from the west who know about it will agree. I
was stating that the organization could absorb these local government organi-
zations so that we will have it in one central organization comprehensive of
Canada. These banks ought to be capitalized by the governments—Dominion
and local, and private moneys if it could be so done. In the United States of
America they tried to obtain private money to go along with the government
money, and they failed to do it as far as the capitalizing of the banks was
concerned. They got it in abundance as far as the sale of bonds was
concerned. ‘They should be financed by the sale of bonds; they should be
autonomous but centrally controlled; they should be regulated as to rates of
interest; there should be fixed dividends on capital; there should be co-operation
in the method of making loans—I am going now back to the local associations—
there should be co-operation in the method of making loans, with purchase of
capital stock and such an additional lability on individuals as is necessary to
make borrowers have a sense of responsibility. Further, the loans should be
only for productive purposes, and where necessary extended under guarantees,
and finally, it should contain an amortization plan.
By Mr. Spencer:
Q. May I ask a question, Dr. Tory? You say the loans should be only
made for productive purposes?—A. Yes. Perhaps I had better say instead of
“productive,” “ agricultural ” purposes.
By Mr. Garland:
_ Q. For the relief of past due indebtedness?—A. Yes, and an amortiza-
tion scheme. Now, I have tried to put in the fewest words—
By Mr. McKay:
Q. Is that long term or short term loans?—A. I am speaking now of long
term loans only.
By Mr. Maclean:
Q. How long would it take to put that in operation so it would help the
distressed people?—-A. The difficulty in the way, as I said at the last meet-
ing, is the difficulty of co-ordinating the present efforts into a common system,
and I would suggest this. You asked me definitely to state what I would
do in the emergency. If we were free to do what we thought was wise in
the emergency, and I was advising what to do, I would advise that legis-
lation be passed in this Parliament for the purpose of allowing the Dominion
government to make loans in the interim to local governments to be used
through their own machinery, on the guarantee of the local government, and
rae we pe ER time to work out a general plan that would be comprehensive
of the whole.
By Mr. MacLean:
Q. The main thing is to get the authorization of this Session?—A. I have
thought of it a good deal, and I see no other way of obtaining the time to
DT Hy Vi ony)
BANKING AND COMMERCE 289
APPENDIX No. 1
work out a scheme, and at the same time relieve the pressing needs of the
people except by the government taking action.
By Mr. Good:
Q. The suggestion was made at the last sitting at which you attended that
that assistance should take the form of advances under the Finance Act as it
is now, to the banks. Have you considered that?—A. Yes. That raises the
question that Mr. Shaw asked me about, to consider the central reserve bank.
Q. Not necessarily, I think—A. It is involved in that to a certain extent,
the same idea is in it as far as the long term loans are concerned. I think there
is very serious and grave difficulty in the way of operating either the Finance
Act or a Central Bank for the purpose of long time loans, but for the purpose
of short term loans I do not see any difficulty in the way.
Q. You quite misunderstand me. I had reference only to the emergency
legislation, not to any permanent scheme—A. My judgment would be that the
Dominion government, if it should pass such legislation, should do it in the
way best calculated to do if easiest.
Q. Have you thought of the manner in which it might extend help?
Here is what I mean. Supposing the government goes and borrows from the
banks at 6 per cent, and loans it out to the provincial governments at 7 per
cent, or something like that, or say at the same percentage. That will start
at a pretty high percentage, and it is questionable whether the provincial gov-
ernments, unless operating at a loss, can be of very much service?—A. I would
take it for granted that the Dominion government, if it did such a thing,
would use its machinery for getting money at the cheapest price possible.
Q. You know last year, I think, or two years ago, one hundred million
dollars was borrowed in New York on the guarantee of the Dominion govern-
ment, and I was wondering if you had given any consideration to that point.
A. No, I had just thought that if that is to be done the Dominion govern-
ment would take its authority and make the loans to the local governments.
I had not thought of the way they would get the money.
By Mr. Miller:
Q. You have referred to the difficulty of getting relief to those who have
not sufficient security. Take the case of one who, because of his pro-
perty going down in value—say he owes $6,000 and this new organization would
consider it security for not more than $5,000. Would that be available, and how
would it be available to give him relief to any degree, or could it give him any
relief?—A. Do you mean if his debt was $6,000 and his property was only
valued at $5,000?
Q. No, the organization considers that it is only security for $5,000.—A.
I would say that wise men would consider a man’s personal quality. I know in
the United States the personal quality of the man is often a very very large
item in determining just what the value was. If a man was known to be good,
that was taken into consideration.
By Mr. McKay:
Q. Character loans?—A. Yes. For example, they told me of a case where
they were making a loan and found that the man had a still on his farm, and
they immediately refused the loan. They would not trust a man whose char-
acter was of that sort, who was violating the law.
Mr. Coors: . He would probably make more money out of the still than
he could out of the farm.
The Witness: My judgment about the situation as it stands at the
present time is that the institution of such a scheme will help those who are
[Dr..H.3 M..,Torg.)
290 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
worthy of help to overcome the difficulties which have come about from causes
that they themselves, and in fact no one, could control. The system would be
exercised with great consideration and leniency, with care exercised not to go
too far beyond the rigid rules of finance.
By Mr. Good:
Q. You would not make it absolutely fixed that no loan should be about
50 per cent of the value?—A. When I spoke of that clause, I omitted another.
I should have said “And 20 per cent of insurable improvements.” I think that
is the expression used. It is more than 50 per cent of the land; the value of the
house and barns and such things is taken into consideration.
By Mr. Miller:
Q. That covers only a part of the point I was getting at. If a man paying
say 8 per cent on $6,000 could be relieved of part of that percentage, so he
could get $5,000 at say 6 per cent or 64 per cent, it would be a great relief ?—
A. Yes. :
Q. On even $4,000?—A. Yes.
Q. Can that be worked out?—A. You mean taking a second mortgage?
Q. It would seem to mean a second mortgage?—A. They have companies
in Europe, in Germany that do a second mortgage business only; that is to
say, they do no first mortgage business. They are organized for the express
purpose of helping just such cases as you refer to. They charge about one
per cent extra interest —I am charging my memory as to that. That is also
true of Denmark. They have what is called second mortgage companies. I
think a case of that sort would have to be considered on its merits. It is difficult
to give a general answer to that question. May I add one general remark in
which I think the Committee will be interested. I found that beginning about
1912 a system of insurance for the balances of amortized loans had been worked
out in Germany, and I took the trouble to take illustrations like the illustration
I used in the report, to find out what it would cost, for example, to insure the
balance of a loan through the period of amortization, and I found that it is
not a very large sum, the idea behind it being to relieve the company in case of
death and to relieve the family in case of death. If a man dies, his debt is paid
as the result of a small extra rate for interest during his lifetime. I have got
fairly reliable figures from Europe as to that. It is working out on a very large
seale in Europe. I would suggest that in planning to meet some special cases
the question of insurance, without too great an expenditure of money on the
part of the person might help out.
Mr. W. F. Mactean: We ought to stick to the main proposition and not
get into too many details. Let us try to get something that we can take to
Parliament this session.
The Witness: I have thought it over very carefully. I do not see any direct
way of meeting the momentary emergency. If the local governments cannot
get money enough to do it, help from the Dominion Government would seem
to be the quick way of doing what is desired. How much money would they
call for in those circumstances, I have not the slightest idea at the moment.
By Mr: W. F. Maclean:
Q. If you had to frame up something, could you not get the provincial
governments to go with this Committee and present the scheme to the Dominion
Government?—A. If my thought were carried out, I do not think that would be
necessary at the moment. All that would be necessary would be to get authority
to do it, and then leave it to the Government to work it out itself. You might
put a maximum on the total amount. I know it is a risky thing to do, and it is
[Dr. H. M. Tory.]
BANKING AND COMMERCE 291
APPENDIX No. 14
a question whether you will get the Government to consider it. But that would
be the proper method to approach it.
By Mr. Spencer:
Q. Did not the Alberta legislature pass legislation last session to enable
it to co-operate with the Federal Government?—A. I think the idea is to have
co-operation, and I know that the Manitoba Government would do it. I do not
know about the Saskatchewan Government. They have their own plan working
fairly smoothly.
By the Hon. Mr. Stevens:
Q. I would like to ask a few questions along the line of your investigation,
which is undoubtedly a most illuminating one. First, security for loaning
purposes is looked upon as much more suitable in settled districts than in new
districts?—A. Unquestionably.
Q. Undoubtedly it is a principle that must be recognized that rates are
naturally higher where conditions are unsettled than where they are stable?—
A. If you are speaking of mortgage companies, yes.
Q. I mean in the main, general rates of interest—A. You are not speaking
for the moment of these organizations?
Q. No. Would I be correct in putting it this way: Your investigation
in the United States, particularly —I think we can perhaps confine ourselves
largely to that—in your investigation there you found three classes of
borrowers, of those needing credit; first, the man who has a sound and fixed real
estate credit which might be called good mortgage security?—A. Yes.
Q. Then you have another class with perhaps some embarrassing debts for
machinery or stock and so on, which would be covered in the intermediate loan
class, whose security might not be quite so good. Then there is a third class
in the United States, for instance, in that northwestern State that you refer to,
where neither the real estate nor the stock and equipment security is sufficient
to meet their enlarged needs?—A. Ys.
Q. That is the problem?—A. The two together, I think form the problem.
Q. But the latter one particularly?—A. Yes, the latter one particularly.
Q. That is a fair division or classification in the United States?—A. Yes.
Q. Did you find that the Farm Loan Board with its various subdivisions,
to which I shall refer in a moment, fairly meet these two?—A. I would say
that they have not refused loans where the first two conditions were reasonably
fulfilled. I think that can be said.
Q. The first?—A. Without question.
Q. And the second fairly well, but the third is not really met at all under
this?—A. No.
Q. Now we will come to our own country, to the Canadian Northwest par-
ticularly, and some districts in British Columbia, but the three Prairie Pro-
vinees, particularly. Is the presence of a substantial number of the third class,
irrespective of what the causes are, contributory to the high rate of interest for
the other two classes?—A. Of course, I cannot answer that question absolutely,
but I would say this, that the general impression one gets from the mortgage
companies is that they rate the interest on a sort of average rate; in other words,
they insure themselves under the good risks.
Q. I do not think that any exception will be taken to that. In other words,
it is like a grocer doing business on a credit basis; he must carry the bad accounts
on the good ones, and in the loaning business the good loans must pay for the
poor loans. That is pretty well accepted I think.
Mr. Keuuner: Does that apply in banking?
[Drv Hee M Dory.)
292 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Hon. Mr. Stevens: Generally speaking, undoubtedly. I am not seeking to
raise an argument. I am not asking these questions for the purpose of drawing
Dr. Tory into a trap or anything of that kind. I want to try and get a proper
basis for what we are to consider.
By Hon. Mr. Stevens:
Q. Now, in a scheme that for instance would provide an ample supply of
credit for the number one and number two classes on their basis, it would be
possible to do it on a very much lower rate of interest than they are to-day
doing it; if we segregate these into those three classes, and for the moment elim-
inate the third class and provide a scheme to take care of the first two classes,
the prevailing rate of interest to these two classes will be materially lower?—
A. Certainly, if you eliminate the most risky part of the borrowings, you elim-
inate the element of danger; but this must be said that no company is lending
money to the third class to-day.
Q. I quite appreciate that, but I was saying that that would be the effect?
—A. Yes.
Q. Would it not be quite sound to say this, that we ought to segregate this
third class and consider it as a problem in itself?—A. That is what the United
States is trying to do now.
Q. Do you think we will have to do that?—A. I think so.
Q. It is a problem in itself that must be faced by the country. I am trying
to get this thing divided so that we can perhaps approach it from two stand-
points. There is sound business in this and there is poor business from the lower
standpoint. Now, may I go a step further. Such a general scheme as they have
in the United States can be made applicable for a rural loaning scheme in Can-
ada, having in mind the two first classes?—A. Yes.
Q. And it would fairly well solve their difficulties?—A. I think so.
Q. Now, the second class which I mentioned would include particularly our
Western farmers who find themselves to-day burdened with heavy obligations
regarding machinery, prompt payments on machinery and upon seed where they
have had a bad crop and such like, and those loans could be co-ordinated and
covered by this American system?—A. I am not inclined to say that that would
be the class that would be most benefited by any farm loan of this type.
By Mr. Garland:
Q. Is it not true that so far as the Northwest is concerned, the last few
years have resulted in a very large cleaning out of that class, of the second class
mentioned by Mr. Stevens, and that the first and the last are really the two
classes left. Mr. Stevens referred to one class as indebted to lumber companies,
machinery companies, and so on; in my opinion they have been largely closed
out in the last few years?—A. You can speak probably with more authority on
that than I can, but my judgment would be that there is a considerable number
of that class left.
By Hon. Mr. Stevens:
Q. Now, another step, Doctor. In this Farm Loan Board system, which we
have in this document, on page xcix of the report, am I correct in saying that in
every instance where the original borrower—the “farmer” is the term used—gets
his advances only when the application and indeed his paper, is endorsed by
either a co-operative institution or a bank?—A. Yes, excepting where dealing
with a joint stock bank.
Q. Even there the joint stock bank must go back of his paper?—A. The
joint stock bank makes the loan.
(Dr. H. M. Tory.]
BANKING AND COMMERCE 293
APPENDIX No. 1
Q. The joint stock bank does loan direct?—A. Yes.
Q. But in all the other cases—A. Somebody else must endorse.
Q. Now, would you consider that the scheme—having in mind this emergency
you were speaking of—whereby the Federal Parliament would make an advance
to the provinces, and the provinces through their loan system would receive the
securities and endorse the securities, depositing that exact collateral endorsed
by them the Government?—A. I have thought of that as embodied really in the
suggestion I made. The kind of security which the Dominion Government
wished to take from the local Government might involve the collateral from the
mortgages, and the responsibility would be—as it is here ultimately, should the
borrower fail—on the local Government. I doubt if having the mortgage put
through the Government would add anything to the security. The local Govern-
ment would probably be the security.
Q. Would you suggest the Federal Government making an advance, say
$25,000,000, to a province, and allow the province full liberty in making a loan?
—A. No, I would not suggest any such sum. I was thinking of the moderate
sum, to meet the present emergency, only, until the whole thing could be
straightened out.
Q. Never mind the sum; how about the method?—A. If the sum was not
larger than the normal borrowing power of the province, I do not see why it
should not make the loan to the province, and hold the province responsible.
Mr. SHAw: Similar to the housing scheme?
The CHarrMAN: In the Housing Scheme and the Highway Act, the same
thing took place, but there were regulations by Order-in-Council to govern the
conditions for advancing to the individual municipalities.
The Witness: I think that should be done.
By Hon. Mr. Stevens:
Q. Now, in connection with the banks—I put the question to Mr. Neill, this
morning, and he very promptly and very frankly responded that the banks would
welcome any workable scheme in rural credit schemes. Have you considered a
scheme whereby we could secure the co-operation of the large banking systems
of Canada in connection with rural credits?—A. I had a discussion with two or
three of the bank men about the possibility of the banks helping, say the local
banks, the Dominion Government and the local government joining hands on it,
and I found an expression of good-will as to the possibilities of that.
Q. Would you consider this,—and I am not reflecting at all, but just stating
the cold-blooded facts—would you consider yourself sufficiently informed on
the whole question in Canada and the possibilities of the application of the rural
credits to enter into a conference with bankers now, and representatives of the
Government ?—A. I think I would know enough about it to take part in the dis-
cussion.
Q. You think it is far enough advanced for practical discussion?—A. Yes,
but as I said the other evening, I would have liked to have had a chance for
observation right in the heart of the country. I could not do it in mid-winter;
it was impossible.
Q. What do you think of the suggestion put forward by the Minister of
Finance—and when I say “The Minister of Finance”, I mean his nominee, and
the Bankers’ association, or a representative of them, and yourself, to enter into
a conference for a study of this question with a view of immediate legislation—
and I mean by “immediate”, this session?—A. It will take some little time.
Personally I am quite prepared, if needed, to drop everything else and go at it.
Q. Do you think there would be any result?—A. I would doubt whether
we would get far enough for legislation this session, because I imagine any
legislation of that sort would be fairly contentious, and it might take time
(Dr. H. M. Tory.]
294 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
to get it straightened out, unless we could get all the parties to agree upon it
beforehand.
Q. Having in mind this emergency legislation of which we have been
speaking, do you think that such an emergency legislation as we might be
able to design and pass this session would meet the needs of this third class—the
most unfortunate class, and the class which presents the greatest problem?—A. I
have very grave doubts about that, Mr. Stevens, and the possibility of any
emergency legislation meeting any considerable number of this third class, of
which we are speaking. Some of the members would know better about the
conditions in the country than I do.
Q. Then, have you considered this—let us not make it solely Canadian, but
take your experience and observation in the United States—would you think
it advisable for the Government, for instance, to encourage a wholesale bankrupcy
movement on the part of these people, let them go into bankruptcy. If it is
hopeless—if the thing is so hopeless as many of the investigations would seem
to indicate? Have you considered that?—A. I have thought of that, Mr. Stevens.
This is the way it appeals to me. There are certain people who will ultimately
go into bankruptcy, and it can be fairly well determined in dealing with indivi-
dual cases who these people are, but the experience of Mr. Fraem of the Debt
Adjustment Bureau, has shown that with a little care in bringing together the
debtors and the creditors—the various groups of people concerned—adjustments
can be made that would bring a great many such men through. That is to say,
they will not go through a Bankruptcy Court, but schemes would be reached to
give these men a chance to start over again. They have had a good many cases
of adjustment in Alberta; I do not know just how many, but I think several
hundred all told, with very great success. The gentleman, Mr. Fraem, who has
been handling the matter, I feel sure, would say that he does not want any inter-
ference whatever, but desires to be allowed to work it out with the mortgage
companies. He has found such good will and such effort to make adjustments,
that he does not want any interference at all.
By the Chairman:
Q. Do they proced under the Bankruptcy Act?—A. No, they meet around
a table, and they say “ Here are this man’s assets, and this is how much he
owes ’—I have not followed the details, but I know of a good many cases of
that kind.
By Hon. Mr. Stevens:
Q. What I am trying to come to is this. Is there any hope for this third
class, and if so, is there anything we can discover to bring about partial or whole
relief, having in mind all these things, particularly your last reference to this
experience in Alberta? Do you consider there is any legislation we can pass this
session that will bring relief to this third class?—A. It would certainly bring
relief to that third class whose affairs on adjustment would make a mortgage a
reasonable way of getting them started again, and adjusting their indebtednesses,
perhaps compromising,—I think that is the word used in bankrupcy—so a mort-
gage could be taken on their property.
Q. That is acting on a scheme such as Alberta is now using?—A. Just get-
ting local groups of the men working on it and trying to find a way out.
Q. Then you think that could only be done by passing what we will call
an ‘ Enabling Act,” placing in the hands of the Federal Government a sum of
money with which they may deal with this emergency ?—A. Really, after thinking
it over carefully, I have not seen any other way out immediately unless they
decide it is the duty of the Federal Government to go into this business and
run in competition with the local government, to start loaning money in the
country, but I doubt if we could get very far this session.
{Dr. H. M. Tory.]
BANKING AND COMMERCE 295
APPENDIX No. 1
By Mr. Garland:
Q. There would not be much competition, just now.—A. Not much, I sup-
pose.
By the Chairman:
Q. They are not loaning any further presently, but already they are bor-
rowers?
By Hon. Mr. Stevens:
Q. Have you any estimate of what would give a measure of relief?—A. No,
I have not.
Q. Have you any knowledge of any figures we could secure which would
give us an estimate of that?—A. I think an estimate could be kad. I tried to
get an estimate in Manitoba, for example, but I did not get any very satis-
factory information. It was said to me in Manitoba, “If we had three or four
million dollars it would be a tremendous relief”. That general remark was
made.
By the Chairman:
Q. In Manitoba?—A. Yes. I do not know how far $10,000,000 would go in
the solution of the difficulty.
By Mr. Maclean:
Q. Have the local government any particular scheme, or have they made
any representations to the Dominion Government for relief?—-A. No, I think
the local Government was waiting for the result of this discussion. They list-
ened with more than interest, and were waiting anxiously for action last year—
hoping that something might be done. I think it is their attitude of mind to-day
that they are waiting for relief. I know I spoke to Mr. Black at Winnipeg, and
also to Mr. Reid, our Treasurer in Edmonton, and suggested if they were going
to pass legislation, they should hold it until we could get a chance for a confer-
ence, and they felt that something had to be done, and perhaps would be done,
here.
Q. Then the local Government are Jooking forward to a conference?—A. I
think they would welcome that. I am speaking only of the western governments.
Mr. Coors: I think we are having rather a wide latitude in the matter of
rural credits, and I want first to ask the Chairman’s permission in what I have
to say, that I be allowed to cover the same ground as Mr. Stevens.
The CHarRMAN: I think it will be agreeable to the Committee that the
greatest latitude be given on this subject. We are trying to obtain as clear a
view as we can on the possibilities of introducing legislation to relieve the
situation, as we know it exists, therefore, the widest latitude should be given, as
I think that is the only way to make any headway.
The Witness: Before Mr. Coote starts, may I add this one word? Mr.
Stevens’ question has brought out the exact reason why I hesitated to make a
recommendation, because the weak point in my investigation is that in the
country. I was asked to do this work in the autumn of the year, and I was not
able then to get to the country, and when I was able it was impossible to get
around very much, and I looked forward to doing that end of it later, when
conditions were more favourable. You will see the reason at once why I have
hesitated to make any formal recommendation.
By Mr. Caldwell:
Q. What do you think of the practicability of a scheme for each province to
set up machinery for carrying on farm loans? Would the overhead cost be so
(Dr. H. M. Tory.]
296 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
large that it would be impossible to do it?—A. That is done in some parts of
Europe where you have a dense population.
By Mr. Garland:
Q. I understand from Mr. Neill this morning that he gave his evidence
rather definitely that any long-term credit scheme could not and should not be
made a part of the present banking system of Canada. Do you agree with that?
—A. Oh, absolutely.
Q. It should not be a part of the present banking system?—A. No.
Q. The sum of money to be loaned ought to be used under a long-term
mortgage system of which you spoke this morning, but in your opinion, would
that not have to be sufficient to be a competitive factor in the mortgage business,
for the purpose of reducing the rate?—A. If it is to serve the general purpose
of bringing interest rates down—
Q. You believe it would be of little use to start a system of long-term
mortgage credits unless we intended to use it or unless it could be used sufficiently
widely to be a factor in reducing interest rates? That is your opinion?—A. Yes.
Q. I do not like to press you with this matter, but I think it is essential—
and the question undoubtedly will come up in the framing of the emergency
legislation—could you give the Committee approximately the amount required,
we will say, in the three Prairie Provinces? I know it will be difficult, but can
you make any estimate?—A. I can give it as a suggestion on the percentage
basis without question. In Germany, I pointed out, it is on a 40 per cent basis;
in France it is a monopoly, of course, the mortgage loan business; in the United
States the loans now amount to about i6 per cent. There is no question but
that 16 per cent is being effective at the moment. I would say from 16 per
cent to 20 per cent.
Q. Then it would be essential that the Government should be in possession
as nearly as possible of the actual figures, showing the mortgage indebtedness
of the province to which legislation is applied?—A. I am in a very delicate
position—if I might say this—
Q. I do not want you to give any figures. I want you to answer this ques-
tion. In order that this legislation should be of use it is essential that it should
be a factor in reducing interest rates. That is it?—A. Yes.
Q. And in order to be a factor in reducing interest rates, a sufficient quantity
of money must be available to go into this mortgage business—to reduce the
rates?—A. I do not think a sufficient amount of money is available in the sense
that we can get it because money grows with demand and when the demand
reaches 20 per cent I think it would become tremendously effective.
Q. The primary object of the establishment of any long-term credit system
should be placing it on a competitive basis?—A. One of the primary objects.
Q. Then in order to achieve that, it would be necessary that the federal
government should be in possession of the actual facts regarding the extent ot
mortgage loans now outstanding?—A. I don’t think so.
Q. How can they arrive then at an estimate?—A. I do not think they seek
to arrive at an estimate. I think the estimate will come normally, as all loans
are made it will act. The American Government did not have exact figures as
to mortgages when they started in, but just as soon as they started the loans,
they soon reached the competitive stage, but they did not know how far they
would go, but with the system of finance it did not make any difference how
far it went, because each man capitalized his own loans; it is on perfectly safe
ground; they do not care how high it goes.
Q. If the emergency suggestion which you made here was brought into
effect, the provincial government would borrow directly from the Federal
[Dr. H. M. Tory.]
BANKING AND COMMERCE 297
APPENDIX No. 1
government?—A. I do not say how it should be done. I think it is a detail
they will have to work out, but I suggested the loans be made from the Dominion
to the local governments.
Q. It just occurred to me and I was wondering if you had thought about it,
that the provincial governments are having some difficulty at the present
moment in securing funds at a low rate of interest, sufficiently low to make it
worth while borrowing?—A. Yes.
Q. Ii they would commence borrowing heavily from the Federal government
in order to put through this business, would it not impair their credit for other
purposes ?—A. I think there is a very grave danger of the credit of the provincial
governments being impaired by over-borrowing and over-loaning, but I do not
think the amounts they could lend under any temporary scheme would be very
very great; the machinery could not work fast enough to make them very
great.
Q. You think it would be possible to establish some system of direct federal
loans at the moment, pending the development of your long terms credit scheme,
to the rural organizations now established; let the loans be made direct to the
provincial governments without any direct responsibility, at least, on the
surface. That would be credit damaging, so far as the provincial governments
are concerned, but that the rural credit associations would be responsible—the
collective credit of the borrowers would be responsible to the Federal govern-
ment?—A. There is no legal difficulty in the way; it is a perfectly simple thing
to arrange.
By the Chairman:
Q. Would you advise the Federal government to do that?—A. In our own
province, the one I know the best, Alberta; there are only 25 co-operative asso-
ciations in the province.
Mr. SteepsMAn: That is about right.
The Witness: You would have to begin to create a lot more legal machinery.
By Mr. Garland:
Q. It could be done anyway ?—A. You would have to create machinery here
to do this in some way.
Q. My idea was to use the provincial government up to the limit of its
ability —A. I think the practical difficulty is to convince the Dominion govern-
ment that it would be wise.
Q. That is the only difficulty?—A. I think that is the real difficulty.
By Mr. Good:
Q. In that connection, the situation in Ontario is that, so far as long term
loans are concerned, we have no local organizations; it is done directly by the
Farm Loan Board—A. Yes, that is quite right.
Q. In that case, any extension of federal aid in Ontario would have to come
through the provincial organizations’ administrative machinery, because there
are no local organizations looking after long term loans. That may be different
in other parts of the province, but I would think it would be very difficult, unless
you equalize the machinery at the present time in existence. It does seem to me
it might be worth while for the Dominion to consider the loans and hold the
province responsible. I do not know whether that could be done or not. They
might run chances, but sometimes it is not a bad thing to run chances.
By Mr. Caldwell:
Q. I would like to ask you to give an expression of opinion as to what
might be done for the provinces like New Brunswick which has no machinery set
rs He Me Torval
298 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
up. We have a provincial Farm Settlement scheme, which is used as a colon-
ization scheme, and a Dominion Soldiers Settlement Board with branches in
New Brunswick. Will you think the matter over as it affects New Brunswick?
—A. The Soldiers Settlement Board might be effective there.
Q. Would there be a possibility of handling it through the Soldiers Settle-
ment Board or the provincial Farm Settlement Board?—A. It is quite possible.
By Mr. Garland:
Q. Doctor Tory, when Mr. Stevens was examining you this afternoon he
referred to the fact that in well-settled districts the rate of interest, under the
commercial mortgage system was naturally lower than in more sparsely settled
districts. Now, is it your opinion that under any long term system of rural
credits, to be of any value to this country, there should be a variation in the
rate of interest over the province?—-A. No, I donot think he was asking me to
say there was. He was simply speaking of a question.
Q. I am not imputing anything to Mr. Stevens.—A. Yes, but in my reply I
was referring to the practice of mortgage companies, under the practice of a
scheme like this, where there can be only one rate of interest.
Q. You believe then there should be an average rate of interest for long
time farm mortgages over the whole country ?—A. Yes, consistent with a security
—only with a certain type of security.
By Mr. Steedsman:
Q. You concur in a general way with the classification given by Mr. Stevens,
that is, classifying the borrowers within the three groups?—A. I could classify
them in two or three other ways equally effective.
Q. But that was generally understood that was about the classification into
which they would fall?—A. Yes.
Q. Now, with regard to the province of Manitoba again. Would you sug-
gest that the need for an emergency fund coming to the relief of the provinces at
the present time would be to take care of, generally speaking, the loans that
are, say, coming due this year; if they could not renew them it would place the
men from class two into class three, of the classifications we were speaking of
a while ago; this to take care of the people who are in danger of getting beyond
a limit of solvency. You would not recommend any great amount be advanced
to any province, but only a limited amount to take care of the cases of that
nature?—A. The cases that were in danger.
By Mr. Good:
Q. Doctor Tory, do you think ten or fifteen million dollars would be quite
effective as relief this year, taking the country as a whole?—A. I would doubt
if the machinery in existence could handle effectively more money than that.
Then again I am subject to the opinion of the men who know the whole nature
of this machinery now, but I suspect that is as much as could be handled. I
would say ten million dollars as the outside limit.
By Mr. Benoit:
Q. For all the provinces?—A. Yes.
The witness retired.
The committee adjourned.
(Dro. OM. Torys)
BANKING AND COMMERCE P39
APPENDIX No. 1
ComMiITTEE Room 429,
Hovusrs oF ComMMoNs,
TuHurspay, June 5, 1924.
The Select Standing Committee ‘on Banking and Commerce met at 11
o’clock a.m., Mr. Vien the Chairman, presiding.
The CuatrMan: The Acting Minister of Finance has a statement to make
to the Committee.
Hon. Mr. Ross: Mr. Chairman and gentlemen, at a previous sitting you
will recall that a statement was made that the Government had under con-
sideration an amendment to the Bank Act to provide for more adequate
inspection. I will table that proposed amendment so that it can be printed in
the records. It is a proposition which I hope will meet with the approval of the
Committee.
Proposed amendment tabled. (See page clviii).
Hon. Mr. Ross: The high spots are briefly these: This new officer will
be known as inspector, and will be appointed by the Minister and hold office
subject to good behaviour. He may be removed by order in council for mis-
behaviour, incapacity or incompetence. It shall be the duty of that inspector to
examine the head offices of all banks at least once a year, and any branch that
he may consider necessary to examine. It is proposed that the confidential
reports which, under the present Act, are made by the shareholders’ auditors
and sent to the directors shall be sent to the inspector. They will be available.
Then, the inspector will be given the power to examine the general manager
or any officials of any bank under oath. Under the present Act, if a bank goes
wrong or if there is any indication of a bank going wrong, there is no provision
for winding that bank up until it suspends payment; that is, the Minister can-
not step in. It is proposed under this amendment that when the inspector is
satisfied that a bank is insolvent he will report to the Minister and we will
then ask the Bankers’ Association to assume responsibility and appoint a
curator. That will automatically stop a bank from going on and taking
deposits. Generally speaking, that is what is involved in this proposed amend-
ment, but incidentally, I would like to say—it is not in here—that it has been
suggested that the inspector’s report to the Minister should be available to
the president of the Bankers’ Association. I would like time to consider that
feature of it, and I should also like the Committee after this had been printed,
to consider the amendments we propose and also that feature which I have just
suggested. It is also proposed that the banks shall be assessed on the basis of
their assets for the cost of this inspector and of the officials who will be
connected with that feature of the work. I suppose that this will go on the
records and will be discussed at a future meeting.
Mr. W. F. Maciean: I would like to ask the Minister in connection with
this matter whether the proposed inspector is to be independent of the Finance
Department and as a matter of duty will inspect all the banks when he sees
fit, and not wait for any instructions from the Minister.
Hon. Mr. Ross: Yes, it will be his duty to do bank inspection, but he will
be an official of the Finance Department. Some department of the Government
must be responsible, and the Finance Department is responsible in these
matters. As a matter of fact, under the Act, it is the Minister of Finance who
has to stand criticism if anything goes wrong with a bank.
Mr. W. F. Mactzan: In the United States, they have an inspector, an
examiner of banks, who is independent of the Treasury Department.
1—32
300 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Cramman: No, Mr. Pole distinctly stated to the Committee that
he himself as the Chief National Banks Examiner was an official of the
Treasury Department. He is not only under the Secretary of the Treasury,
who is their Minister of Finance, but he is also under an official who is the
Comptroller of Currency. The Comptroller of Currency is under the Secretary
of the Treasury.
Hon. Mr. Stevens: Is this to be presented to the Committee in the form
of a proposed draft amendment to the Bank Act?
The CHAIRMAN: Yes.
Hon. Mr. Stevens: Will it be introduced into the House first, or considered
here first?
Hon. Mr. Ross: I am submitting it to the Committee for consideration
before submitting it to the House.
Discussion followed.
Mr. Suaw: I would like to ask the Minister if these two proposed amend-
ments, one providing for inspection, and the other giving the Minister power
in the event of a bank’s insolvency to close that bank are to be taken as the
Minister’s only achievements in the matter of amending the Bank Act? Has
he taken up, for instance, the matter of precedence of Government deposits,
or any other of the many issues that have been raised with regard to the safe-
guarding of deposits?
Hon. Mr. Ross: When these are printed tomorrow, the hon. gentleman
will be able to judge for himself.
Mr. SuHaw: I am asking the Minister now. Of course, if he wants us to
wait until to-morrow—
Hon. Mr. Rogs: There is nothing here of the nature you suggest.
Mr. SuHaw: Then the Minister does not propose any further amendments.
The CHatrMAN: The Minister has said that the report is tabled and will
appear in the proceedings of the Committee to-morrow. Other subjects in
the various resolutions on our order paper are not covered by this amendment,
but that does not mean that the Minister will not propose any further amend-
ments.
Discussion followed.
Mr. W. F. Macrzean: JI would like to ask the Minister whether under this
legislation he proposes to co-ordinate a number of the offices in connection with
the Finance Department, somewhat similar to the co-ordination of a number
of offices under the Comptroller of the Treasury at Washington. For instance,
when he is appointing an inspector of banks, I would like to see him go a
step further and have that inspector—a man to whom I would be prepared to
pay a salary of $25,000 or $30,000—take charge of the Government issue of
notes, take charge of rediscounting for the banks, and have a regular organiza-
tion for that purpose. Perhaps he could take charge of the Mint also and take
charge of the banks’ issue of currency as well as of inspection and the Mint.
He should be an officer responsible more to Parliament and the public than to
the Department. The public would then have more confidence in him. He
would also take charge of another important thing, which has disappeared.
The greatest savings bank in Canada for a long time was in the office
of Deputy Receiver General. I understand that the Deputy Receiver General
in the Maritime Provinces and also in British Columbia took deposits. In
Toronto we have the best savings bank we ever had in the office of the Deputy
Receiver General in that city. But for some reason or other he ceased taking
deposits some years ago. I would like to ask the Minister if the Deputy
BANKING AND COMMERCE 301
APPENDIX No. 1
Receiver General is taking deposits and doing bank business in that respect
in the Maritime Provinces and in British Columbia. I hope the Minister will
consider these suggestions and that they will go on the record.
Hen. Mr. Rops: Answering Mr. Maclean, I would like to remind him and
the Committee that the Government have now a trustworthy and competent
official at the head of the Department in the present Deputy Minister, an excel-
lent man, who has been many years in the service. The proposition is that the
inspector general will be directly under the Minister, but he will devote his time
to this special work. As regards other features of it, these will be matter for
consideration. I am not one of those who are prepared to admit that Canadians
are inferior to the people of any other country; nor am I prepared to admit that
the United States has a banking system that is better than the banking system
of our counry. Under our Finance Act, every provision is made for rediscounting
in banks and the proof of it is that during all the years of the Finance Act we
have not had trouble.
Discussion followed.
Mr. W. F. Macrean: The Minister was going to answer my question about
the Deputy Receiver General.
Hon. Mr. Ross: I will look into that, Mr. Maclean.
The CuartrMan: Mr. Spencer moves that Mr. Edwards be recalled.
Motion agreed to.
Mr. Greorce Epwarps recalled.
By Mr. Good:
Q. I have not had a chance to ask Mr. Edwards any questions yet, and I
would like to ask a few; I hope I will not take up too much time. Mr. Edwards,
since when have you been connected with the Finance Department?—A. Do you
refer to banking matters?
Q. Yes.—A. My first instructions from the Finance Department, in con-
nection with bank matters, were to examine the affairs of the Merchants Bank.
Q. After that, when?—A. After that, to consider how the experience in the
Merchants Bank case could be introduced into the Act, what improvement could
be made to the Act.
Q. You were responsible, I presume, along with the Minister of Finance for
a number of the amendments that were brought down last year?—A. I offered
the Minister a good many suggestions.
Q. Since the close of last year, how long have you been connected with the
Finance Department, inspecting or looking into banking affairs?—A. When the
provisions of the new Bank Act came into force, certain provisions in October,
I was called in to examine special information furnished by the banks, special
returns which the Minister had called for.
Q. Since October, about how much time have you put in on this particular
work?—A. Not a great deal.
Q. About how much?—A. In the examination of those returns, I should say,
not more than ten days at the outside.
Q. During the last eight months, approximately ?-—A. Yes.
Q. Did you secure any sufficient information during those ten days?—A. Yes.
Q. Some of which is of a confidential character, I suppose?—-A. That is as
I understand it, yes.
Q. Do you consider that ten days’ examination of the returns made by bank
auditors—I presume that is what you were examining—has been sufficient to
warrant you in making suggestions for this year?—A. My examination of the
[Mr. George Edwards.]
1— 323
302 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
special information furnished by the banks has been of such a nature that I can
cover it very well and form a very sound opinion upon the subject within the
ten days.
Q. You spoke of special information furnished by the banks. Who required
that information?—A. The Minister.
Q. On your suggestion or recommendation?—A. I offered the Minister advice
on the subject, yes.
Q. You said you wanted certain information from the banks?—A. Yes.
Q. And he asked the banks to furnish that information, and they furnished
it, and you examined it?—A. Yes.
Q. And you came to certain conclusions after the examination of that
evidence?—A. Yes.
Q. Would you be prepared to give this Committee some information regard-
ing the situation as you found it, if we sat in camera?—A. With the Minister’s
consent, yes.
Q. Have you made any investigation as to the comparative bank failures
in Canada and in other countries, say during the last ten or twenty-five years?
—A. I am aware generally of what every one knows as to the extent of bank
failures in the United States and in Canada.
Q. I understand there has been some dispute as to the facts in that
connection, and J ask you whether you personally made any investigation?—
A. I have not made any investigation of the situation in the United States.
All my information as to that comes from official reports.
Q. Do you think it would be wise that the the shareholders of banks
should have further information regarding the banks’ affairs, such, for instance,
as was suggested by the amendment of last year which I read to Mr. Neill the
other day. I do not know whether you were here or not. For instance,
requiring that
“That profit and loss statement shall include and show on the one
part the amount of
(a) Balance of profit and loss account carried forward from previous
year;
(b) Rebate of interest on unmatured bills as at close of previous
year;
(c) Gross profits, including balances of all interest, commission,
exchange and other revenue-producing accounts;
(d) Premium on new stock sold;
(e) Bad debts recovered, previously written off, and the statement
shall include and show on the other part; ;
(a) Expenses of management and operation;
(b) Interests paid on deposits;
(c) Interest reserved on unmatured bills;
(d) Amount written off bank premises;
(e) Amount transferred to appropriation account for losses;
(f) Amount transferred to officers’ pension fund;
(g) Sundry appropriations or disbursements not included under
foregoing heads, and to be shown in detail;
(h) Dividends declared (specifying number and date) ;
(7) Amount transferred to rest account;
(j) Balance at credit of profit and loss account.”
This, you will observe is some additional information, which, it was
suggested last year, should be included in the annual statement for the informa-
tion of shareholders and the public. What is your judgment as to the amplifica-
{Mr. George Edwards.]
BANKING AND COMMERCE 303
APPENDIX No. 1
tion of the returns in that respect?—-A. A certain amount of the information
suggested by the schedule which you have just read is already furnished to the
shareholders at their meetings.
Q. Is it in the annual statement, or is it furnished verbally?—A. I have
seen a great deal of it in the published statements; for instance, as to the amount
written off bank premises, the amounts of dividends. I cannot recall all the
categories, but I remember the amendment to this effect; I think that is the
substance of the amendment last year?
Q. That is right—A. After I examined that amendment particularly, I
came to this conclusion: There was a great deal of it which was already
furnished to the shareholders; there was some of it which was not properly
an element in a profit and loss statement, and should not be so treated; and
there was some information provided for there which under the method of
accounting of a bank could not be got out in that way.
Q. You say that some of this information is already being furnished to
shareholders. However, it is not required to be furnished by the Act, is it?—
A. It is usually furnished but not required to be furnished under the Act.
Q. Would it not be better, in your judgment, to have the requirements
somewhat extended so as to make the statements of all banks similar in
form by the inclusion of further items?—A. I think that the present state-
ment required to be furnished to shareholders could be amplified to some
extent.
Q. Would you be prepared to examine into that and make a statement
to the Committee as to what further items might be included with profit?—
Ay’ Yes.
Q. I hope that Mr. Edwards, with the consent of the Committee, will make
a further recommendation in that direction. Do you think any information
should be given as to the various investments, the classification of investments,
that this matter should be made public?—A. The classification now provided
by the Act is fairly ample but it might be extended.
Q. Is it desirable that the public should know the general character of
a bank’s investments?—-A. Oh yes. I suggest that they are already able from
schedule (g) to determine with fair accuracy the character of a bank’s invest-
ments. The question of amplifying schedule (g) is one that might be con-
sidered, although I am not sure that it could be amplified to a very much
greater extent.
Q. What is the idea of not making public the appropriation accounts?
That matter received consideration last year, and it was discussed here the
other day?—A. The appropriation account, should not I think, be made public
for this reason: An appropriation account is an amount set aside to provide
for expected losses. Now, the policy of the banks is not the same with regard
to the treatment of that account. Some banks will carry an amount, a doubtful
loan, at its face value and carry a proper reserve in an appropriation account.
Another bank will write that loan down to the extent of the probable loss and
carry nothing in the appropriation account. In these circumstances, it might
easily mislead the public, not knowing the method of treatment or the position
of the bank in regard to its appropriation.
Q. Have you made any investigation as to the earnings of Canadian banks
compared with the earnings of banks elsewhere during the past ten years?—
~ A. No} Ihave’ not.
By Mr. Garland:
Q. Would you permit me, Mr. Good, to ask a question? Do you know
whether it would be advisable to have some regulation established, say, by the
[Mr. George Edwards.]
304 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Bankers Association or by some other organization, which would compel banks
to have a regular form of presenting their contingencies or appropriation
accounts to the public. In that case, what objection would you have to the
publication of the appropriation account?—A. My difficulty is that I cannot
think of a plan for standardizing such a practice. It is almost impossible, when
you consider that every loan that has any element of doubt about it, will differ
from every other loan that has an element of doubt about it. You cannot
apply an arbitrary rule to a matter of that kind. I do not see how it can be
done. :
Q. You said that the banks’ practice varies?—A. Yes.
Q. In regard to the treatment of the same type of fund?—A. Yes. For
the purpose of your question I am giving you an additional consideration; that
is, it would be very difficult indeed to apply an arbitrary rule as to appropria-
tions for all classes of bank loans as to which there was any element of doubt.
Q. Does the witness know if it is particularly essential that there should
be, as far as possible, standarization of the method of showing the condition
of the banks to the Minister of Finance at least; and is it not necessary that
the public should know these things. If the banking business is in such a
shaky state that the publication of its appropriation account and contingencies’
account might destroy the banks, is it not just as well to take steps to remedy
that situation?—A. It might not destroy the banks, but it might give a mis-
leading impression as to the position of the banks.
By Mr. Good:
Q. I was going to ask you whether you had made any investigation as to
the earnings of Canadian banks compared with the earnings of banks else-
where, say in the United States and Australia and so on, within the last ten
years?—A. No, I do not know anything more than any one might know.
Q. If you were an inspector of banks, do you think it would be your duty
to look into matters of that sort?—-A. I think the question of the earning power
of banks, as to whether they can carry on under the conditions that are prevalent
is a very important question; the earning power of a bank is probably the chief
consideration.
Q. If you found a bank paying dividends out of capital, what would be
your duty, if you were an inspector?—A. It would depend upon what the duties
would be, whether they were defined by statute or otherwise. But speaking
generally, the duty of the inspector would be to quarrel with that and take
such steps as would be effective to put an end to practices of that nature.
Q. In the matter of proportion between the total capital of Canadian banks
and the total liabilities—that has been under consideration for some time—
have you any views as to what might be called a safe proportion?—A. I would
not be an authority on that subject.
Q. Should an inspector of banks be an authority on a question of that
sort?—-A. He should have an opinion and he should endeavor to fortify his
opinion by reference to better authorities than himself.
Q. Suppose that you found the proportion between the total capital and
the total liabilities of banks in the United States, Europe and Australasia was
twice as great as it is in Canada, would you consider it more or less of a menace
to the Canadian banking system if you found a growing disparity?—A. I
would consider it a subject for inquiry.
Q. You have no information at the present time as to what it might
involve?—A. I have not.
Q. Have you looked into the proportion between the amount of a bank’s
capital and the amount invested in premises?—A. Not very closely.
[Mr. George Edwards.]
BANKING AND COMMERCE 305
APPENDIX No. 1
Q. Do you think that that is a matter which should engage the attention
of an inspector?—A. I do.
Q. If he found that too much in proportion was invested in premises, it
would be a matter for remonstrance?—A. Both that and the question of
whether there was a sufficient writing down of the premises to eventually bring
the bank out of that position,
Q. I take it that in your judgment, an inspector ought to see that too great
an amount is not invested in bank premises and that the writing off is proceeded
with at a reasonable rate?—A. Yes.
Q. Do you know from your examination of the returns furnished by Cana-
ians banks—those special returns—whether or not the banks which have lost
deposits have been able to reduce their losses in comparison, or have had to
ae on advances from the Government?—A. I am not prepared to answer
that
Q. Have you looked into the matter at all?—A. I have not. You will
understand that anything I have done has been done under direct instructions.
I have not been given any roving commission or anything of that kind:
Q. Your instructions have been specific?—A. Yes.
Q. Can you give them in a general way? Have they been to ascertain as
to the solvency of Canadian banks?—A. They have been to consider the in-
formation that comes to the Minister other than in the form of special informa-
tion, and to advise him respecting the position thus disclosed.
@. I presume the purpose is to discover whether or not there is any
serious danger to any other banks?—A. Practically to see whether they are
solvent or otherwise.
Q. You would not care to express any opinion in public on that matter?—
A. No, not without the Minister’s consent.
Q. Have you looked into the proportion of salaries and expenses in Cana-
dians banks compared with banks elsewhere?—A. No, I have not, because
the information is not now furnished by the Canadian banks.
Q. Do you think that information should be furnished?—A. It should
be available, yes. In my reply to your first question about particulars in the
profit and loss schedule, I would say that the Minister should have all that in-
formation. I am not at present expressing any opinion as to how much of it
should be available for the shareholders.
Q. You think that the fullest possible information should be given to the
Minister confidentially ?—A. Yes.
Q. You do not know of any payments of dividends in Canada, out of
capital during the last few years?
Mr. Hearty: Do you mean authorized capital, or authorized capital plus
surplus?
Mr. Goop: I should have said out of capital, plus reserve.
The Cuarrman: Not authorized, but paid-up.
By Mr. Good:
Q. Do you know of dividends being paid out of reserve which the capital
had not earned?—A. Yes, in the Merchants Bank case dividends were paid
out of reserve.
By Mr. Marler:
Q. May I interject a question there. There is no real reason why dividends
should not be paid out of reserve?—A. Not at all, if they care to take the re-
sponsibility for doing so. There are certain limitations upon dividends. Of
course, they must have thirty per cent of reserve in order to declare a dividend
over eight per cent.
(Mr. George Edwards.]
306 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Mr. Goon: I had some figures, but I take it that the witness’ investigation
has been of such a character as would not render him capable of answering the
questions. I was hoping that Mr. Edwards would furnish some information.
He has spent ten days on the examination, and I realize that he is not in a
position to give us detailed information.
The CuamrMAN: Have you any definite question that you would like to
put to Mr. Edwards or that you would like him to investigate?
Mr. Goon: Not at present.
By Mr. W. F. Maclean:
Q. About the capitalization of banks, take the case of the Home Bank;
what was its capitalization?—A. $2,000,000.
Q. Do you know now how long before it ceased operations it had impaired
its capital?—A. Quite a number of years, Mr. Maclean.
Q. And is this the case that while it had impaired its capital, it continued
to issue notes to the full extent of its capital?—-A. Yes, or reasonably up to that.
Q. Do you think there should be an amendment to the Bank Act to the effect
that a sort of audit should be kept on the banks so that when they impair their
capital their privilege of issuing notes should be reduced to the amount of their
impaired capital?—A. Yes.
Q. This is one of the scandals of banking up to the present. There have
been cases where the capital has been impaired for years and yet there has not
been any limitation in that direction. I hope you will make a suggestion of that
kind to the Minister.
By Mr. Spencer:
Q. I would like to ask a few questions. You are aware no doubt, that in a
pamphlet which the Bankers Association circulated amongst the members, they
stated that depositors had a fourth mortgage on the assets of the bank in case of
failure?—A. That is so although I do not just remember seeing it there.
Q. Now, what protection, in your opinion, has the depositor?—A. Well,
the bank must be solvent and must be doing a profitable business. I should say
that these two considerations should be present, and any knowledge that will
assure the depositor that that will be the case would be the best assurance he
could have.
Q. What protection, in your opinion has a depositor in a bank?—A. He has
none, excepting the knowledge that the bank is a sound financial institution.
Q. That he thinks the bank is sound?—A. Yes, that is his judgment, I
suppose.
Q. Take, for instance, the Home Bank case which has been insolvent since
1916, I understand, and where the public have been allowed to deposit on the
understanding that it was sound.—A. Yes.
Q. Would you say that the double liability is a safeguard to depositors?—
A. To a certain extent.
Q. You would not care to say to what extent?—A. I have already said, I
think, in my previous evidence before the Committee, that I think it might be
depended upon to the extent of 50 per cent. My attention was directed to
the fact that a couple of banks which had wound up their affairs had collected a
much larger percentage, and I took the trouble to look into it and I find that
the two banks mentioned, the Bank of Yarmouth which failed in 1905 collected
84 per cent, and the Ontario Bank collected 84 per cent.
By the Chairman:
Q. In what year?—A. In 1906. In the case of the Sovereign Bank, the
total amount collected on account of double liability was $179,000, which is a
[Mr. George Edwards.]
BANKING AND COMMERCE 307
APPENDIX No. 1
very small percentage compared with its capital of $3,000,000. That was in
1908.
By Mr. Morin:
Q. Have you the figures for the Bank of St. Hyacinthe?
By Mr. Benoit:
Q. Or the figures for the Banque de St. Jean?—A. That bank had a capital
of $500,000.
Mr. Marurr: There is one question I would like to ask before the witness
leaves that particular point.
An Hon. Memser: Give us the list of banks that you have.
Wirness: I will put it in. I obtained this information after I had been
examined previously on the subject. The Banque de St. Jean was suspended in
1908. It had a subscribed capital of $500,000. The double liability collected
amounted to $161,000, about one-third. The Banque de St. Hyacinthe—
By Mr. Benoit:
Q. What was paid to the depositors?
The CHatrMAN: Let the witness give the amounts collected on the doubie
lability and the percentages; then we will ask questions.
Mr. Marurr: Before these questions are asked, I think Mr. Edwards will
agree with me—is it not the case that the double liability, irrespective of per-
centages or amounts, was simply collected in many of these cases to the extent
that it was necessary to collect. In other words, a small amount may have
been collected because that was all that was necessary. Was that not the case
in the Sovereign Bank? I do not want any misapprehension to arise.
The Cuatrman: I would suggest that Mr. Edwards give us the figures and
then we could perhaps supplement his information by putting questions.
Witness: I think it very important to understand the question which Mr.
Marler has put because it may be so in some of these banks with which I am not
familiar.
By the Chairman:
Q. Have you the figures for other banks?
By Mr. Benoit:
Q. What about the Banque St. Hyacinthe?—A. It had a subscribed capital
of $504,000 and the payments on account of double liability amounted to
$156,000. In the case of the Farmers Bank—-this is a test case.
By the Chairman:
Q. In what year?—A. 1910. Its subscribed capital was $584,000, and the
double liability payments to March 12th, 1924 amounted to $314,000, a little
over 50 per cent. The Bank of Vancouver, which is a pretty bad case, suspended
in 1914, and had a subscribed capital of $587,000. The double liability payments
to April 13th, 1923 amounted to $148,000.
Q. In respect to those banks, could you tell us whether those collections
were the total that could be collected, or whether they were simply what it
was necessary to collect?—A. I cannot answer that question in all cases, Mr.
Chairman, yet it is important.
Q. Could you get it and give it to the Committee?
[Mr. George Edwards.]
308 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Benoit:
Q. In the case of the Banque de St. Hyacinthe, only one-half of the
authorized capital was paid up and I would think that your figure covers
payments on the unpaid capital?—A. That is not my information, but I will
note that and endeavour to make sure of it.
The CuamrMaNn: Your suggestion is that the total liability was not called.
Mr. Benorr: It was called, but the amount given by the witness covers the
balance due on the unpaid proportion of the shares.
By Mr. Spencer:
Q. Can you give the Committee an idea of what has been collected from
the double liability in the case of the Home Bank?—A. Not yet, it is still in
the early stages.
Q. The collection has been rather poor up to date, I believe?—A. I think
so.
Q. What is to prevent shares from being transferred to men of straw
previous to a bank’s collapse?—A. Nothing.
Q. What is to prevent a shareholder being so heavily in debt to a bank
as to off-set his value as a shareholder to the depositor in double liability ?—A.
Nothing.
Q. Were the Home Bank auditors qualified men?—-A. The Home Bank
auditor was not a chartered accountant; he was not a trained accountant in
the sense that I understand it.
Q. Were they as well qualified as the auditors who audit other banks?—A.
The auditors of other banks are men who are practised in accounts and are in
daily contact with commercial and other forms of accounts. In the case of
the Home Bank the auditor was occupying a position of an academic sort; he
was employed at a college in Toronto, and I do not see how he could possibly
have the opportunities for acquiring the knowledge by personal contact with
business sufficient to enable him to audit properly that bank.
Q. Did they have the same auditor from 1916 until 1923?—A. Yes.
Q. Was he a member of the Chartered Accountants?—A. No.
Q. Do the banks have to inform the Minister of Finance as to who they
are having to inspect them?—A. As distinguished from an audit?
Q. No, when a bank engages auditors to look over their books, do they
have to notify the Minister of Finance and give the names of the men they have
engaged?—A. I think it goes to the Minister of Finance in the form of the
public statement which has to be certified and furnished to the Minister.
Q. The Minister of Finance, since 1916, would have a knowledge of who
was auditing the Home Bank accounts?—A. Oh yes.
Q. And with that knowledge they saw fit to let them go on auditing the
accounts from 1916 to 1923, thinking it was in the public safety?—A. I do not
know how the Minister could know very much about the professional com-
petency of the man who was appointed to audit the bank. Under the revision
of 1913, there were no qualifications provided in the Act whatever, as to who
might be an auditor. Conceivably, he might not even be an accountant. But
if his name was found in the list, for any reason, he would be eligible for
appointment as auditor. I think they were all accountants.
Q. I take it that the suggestions put forward by the Acting-Minister of
Finance this morning, with regard to the appointment of an inspector general—
if a man of that calibre had been engaged to audit the books of the banks the
carrying on of the Home Bank would have been impossible?—A. Would you
just ask that question again, please?
(Mr. George Edwards.]
BANKING AND COMMERCE 309
APPENDIX No. 1
_ Q. If the recommendation put forward to this Committee by the Acting
Minister of Finance this morning had been in effect, and we had had an in-
spector general as outlined by him, would it have been possible for a man
such as you outlined to audit the Home Bank’s accounts for many years without
being reported to the Minister of Finance? Would an inspector general have
allowed him to carry on?—A. I would say absolutely no.
_Q. What was to stop any other bank from employing a similar man to
audit its. books?—A. There is now a provision—
Q. Brought in last year, but up to 1923?—A. None.
Q. There is no reason why any bank in Canada could not have been
audited by a man similar to the man who audited the Home Bank’s books up
to 1923?—A. None whatever.
; a Did the Home Bank send the regular returns to the Minister of Finance?
—A. Yes.
Q. Were these returns examined by Government officials?—A. I cannot
say personally.
Q. You need not answer this question if you do not want to, but do
you understand that they were not examined, otherwise pigeon-holed?—A. I
would not care to say that; I do not know.
Q. If they did examine them, how did the weaknesses of the bank escape
notice since 1916?—A. I think the forms of the returns did not lend themselves
to an intelligent judgment upon the bank’s affairs.
Q. Then why did the Government—I will not say any particular Govern-
ment,—not have those returns made by the banks and sent to the Finance
Department examined in the interests of the public?—A. I cannot answer that.
Q. It is the fact that they have been sent in, and that although there were
weaknesses in our Canadian banking system as evidenced in the Merchants
Bank, the Home Bank, and the Banque Nationale, those returns were not
checked sufficiently so that the Government could warn the public?—A. I think
one of the theories regarding one of those returns is that if the information is
made public, every one will have an opportunity to form an opinion as to the
position of the bank. In other words, publicity rather than honesty of judgment
in the Department.
Q. In the past we have had a list of returns in the Canada Gazette which
meant nothing. We were under the impression that those returns were checked
up by the Department, and that if there were any weaknesses in the system
they would be looked into by the Finance Department. We know perfectly
well now that those returns may have been good or false returns—in some cases
they were false, and therefore the public have been under a great handicap
because those returns were not examined closely. Do you agree with that?—A.
To some extent, but the state of the law is partly responsible for that.
By Mr. Good:
Q. Is it your contention that the returns themselves were ineffective or
deficient?—A. I think they were deficient, and I think the state of the law, as
developed at the trial of the Merchants Bank case, showed that the information
furnished by those returns was necessarily defective information; that is to
say, it took account of books rather than of facts.
By Mr. Spencer:
Q. The returns were not only defective, but they did not safeguard the
public interest because they were not inspected?—A. I would not say because
they were not inspected, but they did not safeguard the public interest.
Q. If they were inspected, the deficiencies in the returns were not recognized
by whoever inspected them?—A. I think the answer is—take the Home Bank
{Mr. George Edwards.]
310 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
returns, there is nothing in the Home Bank returns, month by month, to the
Department under the provision of the old Act, from which officials of the
ee Department would be able to form an opinion as to the weakness of a
ank.
Q. You will agree then as to the absolute necessity of having, not only a
more thorough public inspection, but a Government inspection, outside of the
banks’ inspection, as outlined by the Acting Minister of Finance this morning?
—A. I think there should: be some additional information available to the
Department, which is obtainable only by an appointed officer.
By Mr. Garland:
Q. Was any complaint ever made to the Department of Finance regarding
the qualifications of the auditor of the Home Bank?—A. I am not aware of
any.
By Mr. W. F. Maclean:
Q. In connection with deposits in the bank, is it a fact that the notes
issued by a bank are a priority on the deposits?—A. They are a priority on
the assets.
Q. If we had a Government currency in place of the bank note currency,
there would not be need of that responsibility on the depositors to redeem
notes issued by the bank?—A. I cannot see any difference in the case of Gov-
ernment currency. A bank would have to pay for it and that would take so
much of the assets out of the bank.
Q. If they paid for it and got legal tender and deposited it with a so-called
Government reserve bank, and the bank notes came out of another place—
when these bank notes come out they have to be paid out of depositors’ money?
—A. The bank has to have a corresponding amount of assets to take care of
that situation.
Q. Would it not be better in the interests of banking, in the interests of
shareholders and in the interests of depositors that a Government currency
should take the place of the bank note currency which exists now and which
is a charge against the deposits in the bank?—A. I do not think it would make
any difference.
Q. Would it be better for the public?—A. I do not think it would make any
difference to the public.
By Mr. Spencer:
Q. I would like to take— A. May I quote from the Act for Mr. Maclean’s
benefit, Section 61.
“Except as hereinafter provided, the total amount of the notes of
a bank in circulation at any time shall not exceed the aggregate of—
(a) The amount of the unimpaired paid up capital of the bank—
By Mr. Maclean:
Q. Did that take place in the case of the Home Bank?—A. You said that
that was not in the law at the present time and I am pointing out that it is.
Q. Was it observed in the case of the Home Bank? Were they not issuing
notes for years against an impaired capital and were they not doing an illegal
thing?—A. That is another question. I was simply dealing with the suggestion
that it was not in the Act.
By Mr. Coote:
Q. May I ask you to explain that word “Unimpaired,” that is capital
unimpaired?
(Mr. George Edwards.]
BANKING AND COMMERCE 311
APPENDIX No. 1
By Mr. W. F. Maclean:
Q. The Home Bank capital was impaired six years before?—A. It was
never admitted that it was impaired.
By Mr. Benoit:
Q. Which authority controls the issuance of currency?—A. The Bankers’
Association is charged with the duty of seeing that the bank currency is not
overissued and it is regulated in various ways. :
Q. The Government has no authority at all to supervise?-—A. The Min-
ister?
Q. The Government or the Minister has no authority to supervise the
issuance of the currency?—A. I am not sure that I understand the question.
By the Chairman:
Q. The hon. member would like to know whether the Finance Minister
can control the currency?—A. The Minister of Finance collects interest on any
over-issue. That is in the nature of a deterrent. A bank cannot always be sure
that it is always within its statutory powers, when a bank has several hundred
branches; until the monthly reports come in, it is not known exactly how the
circulation of the bank is. If it happens to be over issued, a bank at once
endeavours to correct that, and as a penalty for that over-issue, they pay to the
Minister a fine.
By Mr. Benoit:
Q. How do they know?—A. The banks will know when they get their
returns.
By Mr. Coote:
Q. Is the Minister dependent on the information which the banks furnish
in knowing whether the banks have overissued or not?—A. Yes.
By the Chairman:
Q. What is the power of the Minister to deal with banks to reduce their
circulation?—A. There are penal clauses in the Act which enable the Minister
to take action and to have officers of the bank fined.
Q. But outside of that?—A. There is nothing.
By Mr. Coote:
Q. Have you ever known a bank pay the Department for an over-issue?
—A. Oh yes, they are paying it all the time, whenever it occurs it is done.
There is quite a substantial item of revenue comes in in respect to that.
By Mr. Healy:
Q. How does the Bankers’ Association supervise the issuance of currency?
By Mr. W. F. Maclean:
Q. Why should the Bankers’ Association supervise the issuance of currency;
that is the point?—A. I think that if I read section 124 I will be accurate; I
do not want to make any mistake. (Reads).
“The Association may, at any meeting thereof with the approval .
of two-thirds in number of the banks represented at such meeting, if
the banks so approving have at least two-thirds in par value of the paid-
up capital of the banks so represented, make bylaws, rules and regula-
tions respecting: —
(a) All matters relating to the appointment or removal of the
curator, and his powers and duties;
[Mr. George Edwards.]
312 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
(6) the supervision of the making of the notes of the banks which
are intended for circulation, and the delivery thereof to the banks;
(c) the inspection of the disposition made by the banks of such
notes;
(d) the destruction of notes of the banks;
(e) the custody and management of the central gold reserves and
the carrying out of the provisions of this Act relating to such reserves;
and
(f) the imposition of penalties for the breach or non-observance
of any by-law, rule or regulation made by virtue of this section.”
By Mr. Healy:
Q. When did that section become law?—A. Sixty-three and sixty-four
Victoria—quite a long while ago.
Q. That was the law during the life of the Home Bank?—A. Yes.
Q. And the Bankers Association allowed the Home Bank to over issue
currency for the past six years?—A. I do not know just how to accept the form
of your question, Mr. Healy; the facts are well known. The notes were issued
up to or nearly up to the paid-up capital of the Home Bank.
Q. And yet they allowed the Home Bank to issue currency beyond its
legal right?—-A. Just what the Bankers Association actually did I am unable
to say.
Q. I am asking you this: The Bankers Association for the past six years
exercised that legal authority?—A. I do not know; it was their power.
Q. They had that legal authority2?—A. They had the power to do so,
yes.
Q. And during the past six years the Home Bank did issue currency beyond
its legal right?—A. Yes.
Q. Although it was in the power of the Bankers Association to prevent
that?—A. It was in the power of the bank to do the things set down in the
Act. I do not know—I want to be clear on this—how the Bankers Association
would exercise that power unless they knew what the unimpaired capital of
the Home Bank was. I do not know what the measure of responsibility of the
Bankers Association would be in the absence of definite information as to the
impairment of the capital. I would prefer not to offer an opinion on that;
that is all.
Q. It will be for somebody else to judge what the legal responsibility of
the Bankers Association was, but if they did not have the knowledge, or had
no way of getting the knowledge of the condition of the Home Bank, it was
very dangerous to put them in charge of the issue of currency, was it not?—A.
I think that is a fair inference.
By Mr. W. F. Maclean:
Q. Is it not a fair result of that that there ought to be some high-class
official to look after these things instead of leaving them to a Bankers Associa-
tion or private organization?—A. That is the same question that I think I have
answered several times.
Q. What is the answer to it? We have got the Bankers Association and
I would like to ask what the country ought to have for its protection in this
case.
Mr. Marter: Mr. Healy—
Mri Weak, Macuean: I asked for an answer. In view of this condition
that the Bankers Association have not functioned, what protection does he sug-
(Mr. George Edwards.]
BANKING AND COMMERCE 313
APPENDIX No. 1
gest for the public? Does he not think there should be an official like the
Comptroller of Currency in the United States?
Wirness: I think a Government-appointed official such as I have indicated
would be able to perform these duties.
By Mr. Coote:
Q. Just to make it clear to some members who I think are not very clear
on this point, would Mr. Edwards tell us whether it is a fact that bankers
really order these notes to be printed to any amount they desire for any par-
ticular use?—A. I do not know what the fact is, but I would assume that they
exercise the functions described there. I have no access to the Canadian
Bankers’ Association’s affairs at all.
Q. You have access to the affairs of some of the individual banks. Is it not
a fact that they have notes printed very much in excess of the amount they
are allowed to issue?—A. Yes, necessarily so.
Mr. Marter: Printed, not issued.
Witness: Printed, but not issued. The restriction is on the issuing, not
on the printing.
By Mr. Coote:
Q. Is it a fact that the banks do issue at times more notes than they are
allowed to under the Act?—A. Occasionally.
Q. Is it a fact that under the present procedure a bank may exceed that to
dae a large amount without the Department of Finance being aware of it?—
. No.
Q. You say it would not be possible?—A. I think it would not be possible.
Q. In what way would the Department of Finance be able to know that the
bank had issued more than it was allowed to?—A. By its own reports.
Q. By the bank’s own reports?—A. Yes.
Q. Have you known banks to furnish false reports to the Government?—A.
Not in that respect.
Q. In any other respect?—A. Oh yes, the Home Bank did, I think.
Q. Would there not be more temptation to furnish false reports under this
particular item than in some things that they do furnish?—A. I cannot say any-
thing about the temptations of the banks.
Q. Would it not be quite as possible to furnish false reports in this regard
as in any other?—A. It would be possible.
Q. Is there not a great temptation to over-issue when they have in their
vaults a larger supply of these notes-than they are allowed to have?—A. The
temptation to a good straight-forward banker would be nil; to a banker whose
institution was in a precarious position, he might be tempted that way.
Q. Is it not rather a dangerous privilege to give to the banks to print riotes
and not limit them to the amount which they can print?—A. I do not see any
particular danger about it.
Q. If you had to examine the affairs of a bank that had become insolvent,
and you found an excess issue of say $1,000,000 worth of notes which they had
issued on the last day they were open—A. I did not find that.
Q. Would you not think that this is a dangerous privilege that is given to
the banks?—A. It might lead to that conclusion.
Q. Do you think that the public of Canada have any idea that the banks
have the privilege of printing notes, practically, without any limit?—A. I do
not suppose that the public think very much about it. If they examined
the situation, they would find that it is necessary for a bank to have an excess
quantity of notes printed.
[Mr. George Edwards.]
314 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Do you know of any other banks in the world that have that privilege,
outside of Canadian banks?—A. I have no information at the moment. I under-
stood there are some banks in Europe, but I cannot answer the question of my
own knowledge.
By Mr. Irvine:
Q. You say it is absolutely necessary under the Canadian system to have
an excess of notes printed?—A. I say that a bank has to have a supply available
of its own notes beyond the amount in circulation. If it was not so, it would have
no currency at all with which to transact its daily business.
By Mr. Spencer:
Q. Necessarily of its own notes?—A. If a bank has the privilege of issuing
its own notes up to the amount of its capital and intends to take the fullest
lawful advantage of that privilege, it is necessary to have an excess quantity of
notes printed.
By Mr. Good:
Q. So that they would not ship the notes from one place to another?—A. The
Bank with a large number of branches would have to have a reserve supply at
each of its branches.
By Mr. Coote:
Q. A bank can issue more notes than it is privileged to issue under the Act
before the head office is aware of it?—A. It might happen.
Q. It has often happened?—A. It has happened.
Q. I intend to move in this Committee that. the Bank Act be amended by
providing for a limitation of the amount of a loan which can be made by any
bank to any person, firm or corporation to an amount not exceeding 10 per cent
of the paid-up capital and reserve funds of the bank. I would like to ask Mr.
Edwards whether he remembers a motion along somewhat similar lines last year
and whether he opposed it at that time?—A. I think I offered this opinion, that
a rigid limit of that kind might hamper a very sound and legitimate business
transaction.
Q. In connection with the Merchants Bank case, if such a clause as this had
been in operation at that time, is it not probable that the Merchants Bank would
not have got into difficulties?—A. In order to answer your question it is neces-
sary to recall all the characteristics of that large loan which the Merchants Bank
made. I understood there that that loan had reached those proportions by rea-
son of unauthorized acts of the local manager of the Montreal branch, very
largely.
Q. Do you think he would have had power to make a loan of this size
if this provision had been in the Bank Act?—A. Well, unauthorized things
have been done before. I do not know just what would have been in that case.
@. Would it be proper to draw the inference from your statement that any-
think we put in the Bank Act is of no value because it may be violated by a
manager?—A. No, I think there is a sincere intention on the part of the banks
to observe the conditions of the Act.
Q. Now, in connection with the Banque Nationale, would such a provision
have not probably saved that bank from the difficulties in which it found
itself?—A. From the little I know about the outstanding circumstances that
made the difficulty for the Banque Nationale, the increase of the loan there
was with the hope that it would pull the concern through.
Q. And instead of pulling the loan through, it pulled the bank under?—A.
It has happened, Mr. Coote, that support given to a business concern under
{Mr. George Edwards.]
BANKING AND COMMERCE 315
APPENDIX No. 1
such circumstances has pulled the business concern through. It has also
happened that such support was not sufficient to pull it through. There is no
absolute rule for determining the advisability of supporting such concerns. It
must be in the judgment of the directors, the men who understand the position
and are presumed to have examined all the circumstances.
Q. I would like to ask the same question in regard to the Home Bank.
Was the Home Bank wrecked by loans larger than this limit I propose?—A.
Both large and of bad quality.
Q. But if loans limited to that size had been transacted, is it not quite
probable that the Home Bank might still be in operation?—A. If the Home
Bank had confined itself to legitimate, good banking business along the lines
of loans, it might have been in existence.
Q. Would you say that it is advisable to put such an amendment as this
in the Bank Act in view of your experience in examining the affairs of defunct
banks?—A. I would be prepared to try it out and see what sort of amendment
could be suggested which would not hamper the banks unduly in their
legitimate business.
Q. We are chiefly concerned in this inquiry with the safety of depositors.
Would not this add, to the safety of depositors?—A. It would in this sense:
The more widely the risks of a bank are distributed, the safer the depositors
are.
Q. Is it fact that some of our present banks have more than 50 per cent
of their paid-up capital tied up in what might be termed frozen loans!—A. I
cannot say whether that is so or not.
By Mr. Marler:
Q. Did I understand you to say that the banks had frequently over-issued
as regards notes?—A. Frequently, but accidentally I consider. I do not think
it has been intentional in any case.
Q. As regards intentional over-issuing, that has not occurred at all?—A.
I do not think the banks have intentionally over-issued, certainly not within
my knowledge.
Q. Really a pure accident?—A. A pure accident.
By Mr. Irvine:
Q. I understood Mr. Edwards to say when being cross-examined by Mr.
Coote that the over-issue of notes was a necessity on the part of the banks?—
A. The over-printing of notes is a necessity.
Q. What is the use of printing if they are not to be issued when required?
—A. Take a bank with 500 branches, each one of these branches will have to
have a certain amount of the bank’s own currency in its own vaults to take care
of its own transactions across the counter. If it has not its own notes, it
cannot cash a cheque except in legal tender.
Q. The point I am trying to make is—A. As long as their own notes are
in their own possession, it is so much waste paper. It only becomes an
obligation when they issue the notes, it is a promise to pay.
Q. It is a promise not to pay at the present moment. The point is they
are printed with the view of being issued and being needed, else they would not
be printed at all?—A. An excess quantity is printed with the view of issuing.
By Mr. Marler:
Q. An excess quantity printed but not issued?—A. No, printed with the
view of being able to supply them to all its branches.
(Mr. George Edwards.]
j—33
316 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The CHamman: When required at a given time.
By Mr. Irvine:
Q. You will agree that if they were not printed, they could not be issued?—
A. If they were not printed, it is possible that the full privilege allowed them
by the Act could not be availed of.
Q. Would it not be better to safeguard the over-printing than the over-
issuing?—A. I do not see any difficulty about over-printing, if the Bankers
Association will regulate the requirements of a bank in excess of its issue.
Q. The point is clear that the best way to prevent a bank from over-
issuing would be to prevent it from over-printing?—A. It would be the effectual
way, certainly.
By Mr. W. F. Maclean:
Q. Is it not a fair conclusion from your evidence of this morning that the
Bankers Association, inasmuch as they have failed to function, according to
what you have said.—A. I have not said that.
Q. That the Bankers Association ought to be under inspection.
Mr. Spencer: That is one question—
Mr. F. W. Maclean:
Q. I want that answered. Should the Bankers Association be inspected
in the same way as the banks are for fear that they have failed to function as
authorized by the Act?—A. I think it is a fair thing to say that the Minister
should know how well or how badly the Bankers Association is fulfilling its
fanction.
Q. And therefore, an inspector should inspect it?—A. I suppose that should
be it.
By Mr. Spencer:
Q. Was the Home Bank a fully paid up member in good standing of the
Bankers Association?—-A. I understand it was a member of the Bankers Asso-
ciation.
Q. A fully paid up member?—A. I do not know, I am not sure what the
financial scheme of the Bankers Association is; I cannot answer your question.
Q. Do you know whether it was in good standing?—A. There seems to be
a contribution of some kind, pro rata, to the Bankers Association expense
account.
Q. It was im good standing, I take it?—A. I understand so.
Mr. Spencer: May I ask Mr. Ross if the Home Bank was in good standing
as a member of the Bankers Association?
_ The Cuarrman: As it is five minutes past one o’clock, I think we should
adjourn. I will try to give Mr. Spencer an opportunity to put the question to
Mr. Ross another day.
Witness retired.
The Committee adjourned.
[Mr. Ceoige Edwards.]
BANKING AND COMMERCE 317
APPENDIX No. 1
House or ComMMons,
Committee Room 429,
Wepnespay, June 11, 1924.
The Select Standing Committee on Banking and Commerce met at 11
o’clock a.m.
The Cierk: I am very sorry to have to state that Mr. Vien, the Chairman,
has been called to Montreal on account of illness in his family, and there being
no Deputy Chairman, I must ask you to nominate an Acting Chairman.
Mr. Mackay: I move that Mr. McMaster take the Chair.
Mr. Irvine: I second that.
Mr. McMaster having taken the Chair.
The Actinc CuaimrMan: I thank you gentlemen.
Henry T. Ross, called, sworn and examined.
By Mr. Spencer:
Q. Was the Home Bank a member of the Bankers’ Association?—A. It
was.
Q. What constitutes a membership of the Association? —A. Having obtained
a charter and the right to carry on business. The membership is under the
Statute; it is not at the will of the members of the Association, or the Association
itself. The Home Bank was a member of the Canadian Bankers’ Association
by virtue of the Statute.
Q. Then the Home Bank was a member in good standing?—A. There is no
question of good standing. Parliament enacts that a bank which receives a
charter is a member. There is no question of good standing.
Q. And, therefore, all the banks are members of the Bankers’ Association?
—A. Yes.
Q. Did the Bankers’ Association know of the condition of the Home Bank
prior to the 17th of August, 1923?—-A. You mean its insolvent condition?
Q. Yes?—A. No. é
Q. Did it know that it had its capital impaired?—A. No.
Q. Referring to Section 124, subsection B regarding supervision of the
Bankers’ Association, the making of notes and delivery of same to the banks:
I would like to ask what supervision they are exercising?—A. At the present
time there is this supervision under the Associations’s by-laws passed pursuant
to the Statute referred to. Any bank-note company which prepares notes
for circulation by banks has to make a return to the Association on the ship-
ments of any notes to a bank, a return of the number of notes, their denom-
inations, and all particulars. Then the bank itself has to return, under its
by-laws, to the Association the number of notes received from the bank-note
company. Ledger accounts are kept of these receipts and one is checked against
the other. The Association also receives from each bank a certificate, under
its by-laws, of the destruction of its notes after they have become soiled and
worn. That description is signed by three of the directors of the bank, and sets
forth the details of the denominations and number of notes destroyed, under the
personal supervision of the directors. ‘These destructions are then charged
against the notes in the possession of the bank and the volume of notes in
possession of the bank is that much less.
Q. Do I understand that the three directors all belong to the one bank?
—A. Yes, three directors of their own bank.
[Mr. Henry T. Ross.]
1—334
318 Bek SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Is there any supervision from other banks?—A. No.
Q. Any other supervision from any outside official?—A. No.
Q. Treasury official?—A. No. ; ,
Q. Then it is left entirely to individual banks, through their own officials,
as far as destruction of the notes is concerned?—A. Yes. That is, for solvent
banks. In insolvent banks the Association is represented at the destruction.
Q. The Bankers’ Association, I presume, did not know that the Home
Bank was insolvent after 1916?—A. It did not. ;
Q. And therefore they were allowed to go on in the same way as if they
were a solvent bank?—A. You say “Allowed to go on?” There was no right
to disallow their going on.
Q. Now, as they went on, although they were insolvent, and in that way
not only broke faith with the Bankers’ Association but with the Finance De-
partment in the returns they were sending in, is it not possible that something
may have gone wrong with regard to the destruction of notes?—A. No. I
think the sequel shows there was nothing wrong with the volume of circulation
returns of the Home Bank. The great bulk of the notes of the Home Bank
have been turned in to the the liquidator, and they are quite within the volume
of notes that were credited as being issued by the bank.
Q. You say a record is kept? You mean a record of each individual
bank is kept?—A. Yes, and I may add that every month a statement is issued
by the Association of the circulation of each bank, and the notes received from
the bank note company, the notes destroyed, the balance at the date of the
preceding statement, and the balance in the possession of the bank at the
date of the statement. That is printed, and circulated among the members so
that all may have a knowledge of the bank note account in each individual
bank,
Q. Is there any other way in which the Bankers’ Association are exer-
cising supervision over the issue of notes?—A. Well, at the moment I cannot
think of any other way. Yes, there is too. I may say I have not completed
the activities of the Association under its bylaws in that behalf. Once a year
there is an inspection made on behalf of the Association of the circulation
account of each bank. By resolution of the Association I have made that in-
spection for the last eight years each year. I visit the head office of each
bank and examine all the returns of note circulation made by the various
branches. The branches have to make returns of the note circulation at the
end of each month, that is to say they give a statement of the notes that are
in possession of the branch. These, with the notes in the possession of the
treasury of the bank, as it is called, at the head office, constitute the. notes
in the possession of the bank. That deducted from the account referred to
kept in the bank, of the notes received, less the notes destroyed gives the out-
standing circulation of the bank.
Q. Now, I would like to ask a few questions in regard to the operation of
the Finance Act, taking it through until the notes are issued by the Dominion
Government, placed in the Gold Reserve, and private bills issued. Under the
Finance Act of 1914 I understand that various securities can be taken by the
bank ,to the Treasury Board and rediscounted at a certain margin. Is that
so?—A. That is correct. Perhaps the word “re-discounted” is not the technical
word. These securities are pledged under the Finance Act to the Government,
and advances are made against the securities pledged.
By the Acting Chairman:
Q. But, sir, as a rule, this pledging would be of securities which had already
been pledged with the bank?—A. No. If you speak of securities meaning
{Mr. Henry T. Ross.]
BANKING AND COMMERCE 319
APPENDIX No. 1
Government bonds or municipal bonds, etc., no. It is the bank’s own property
which is pledged, or it might be grain paper, we will say, and this would be
the obligation of an individual customer of the bank.
Q. In that case the word “re-discounting” would be fairly accurate?—A. No.
There will be a volume of these grain securities or notes placed with the
Treasury Board, or its agent, and advances will be made on margin, as Mr.
Spencer has suggested, perhaps 85 per cent or 90 per cent—I do not just know
what the percentages are—against the sum total of these obligations. The
individual obligations are not re-discounted. An advance is made against the
securities when they are pledged.
By Mr. Irvine:
Q. Would city bonds be taken in that case?—A. Yes, under the Finance
Act of 1923.
Q. Take, for instance,—I do not know whether I should mention any
particular city.
The Actine CHarrMawn: Call it “City X”.
By Mr. Irvine:
Q. The bonds of “City X” in a certain year were worth 100. To-day they
are worth 50 and are still deposited with the Treasury Board. Do you think
that is a safe deposit?—A. I suppose in that case the Treasury Board would
probably say that 75 per cent of the market value might be loaned against
this.
By Mr. Euler:
Q. If they depreciate after they have been deposited is there any action
possible?—A. That has to be looked after by the Treasury Board. They could
call for further securities, under the regulations.
By Mr. Spencer:
Q. Can any security pledged to a bank by their customers, either indi-
viduals or a corporation, be turned over to the Treasury Board to get advances
on?—A. It would be within the legal right, but I do not think it is used in
practice.
By Mr. Maclean:
Q. Is there any re-discounting?—A. No, not as that term is used; it is
“advances on security.”
By Mr. Euler:
Q. What are the natures of the securities?—A. There are five classes, begin-
ning with Dominion Government securities, municipal securities, grain receipts,
documents representing grain, and trade paper representing agriculture or com-
merce in any form.
By Mr. Spencer:
Q. As I understand it, commercial notes signed over to the Finance Minister?
—A. Yes.
Q. And accepted by him?—A. Yes. I might add though that the volume
of advances in each class of securities has been relatively small in the past.
The general advances have been against Government securities of the highest
class.
_ Q. We know that Dominion notes are issued to the bank, but I understand
it is not their custom to put them into circulation?—A. The bank gets what
are called “large legals;” they take their advances in large legals.
{Mr. Henry T. Ross.]
320 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. For convenience?—A. Yes. These are employed either in making
clearing house settlements between the banks, to discharge demands upon the
banks in connection with their business, or they may be deposited in the Central
Gold Reserve. I think the bulk of them probably are used for clearing house
urposes.
‘ 0. Those are placed in the Central Gold Reserve—they have the option of
issuing dollar for dollar their own notes?—A. Yes.
Q. I understand the reason for this is to enable the bank to have a large
number of printed notes through their various branches which could not come
into circulation until they were passed over the counter to the public in case
of arun on the bank?—A. No. If I may say so, I think you are confused with
something else. The bank’s own notes up to its capital are not in that classifica-
tion at all.
Q. No restriction there at all?—A. No.
Q. I am talking about notes issued against the Dominion notes put in the
Central Gold Reserve?—A. Yes.
Q. Is it a fact that the banks hold notes that are ready for issue but are
not in circulation until they pass over the counter?—A. Yes.
Q. I understand that was a fact?—A. Yes.
Q. These are private bank notes to enable the bank to meet a run on the
bank, and when they are issued it is an extra quantity of notes, and they would
at once redeposit with the Treasury Board security to cover it—A. No, that
operation could not take place.
Q. What happens if these notes are issued in any large amounts?—-A. The
bank must have the notes of the Dominion in the Central Gold Reserve before
it can pay out any of its own notes. It cannot wait and cover the transaction
afterwards by the deposit of Dominion notes in the Central Gold Reserve.
Q. Then you mean to say that although you are paying 5 per cent on all
Dominion notes put in the Central Gold Reserve, you are not using them
dollar for dollar in the circulation of your own notes?—A. I do not quite follow
you. Just state that again.
Q. You are paying 5 per cent on all Dominion notes that you have against
security ?—A. Yes, under the Finance Act.
Q. Do you not use that privilege to the full in issuing your own notes?
—A. The bank tries to get as close to the limit as possible. It does not want
to pay 5 per cent any longer than it has to. It wants to minnimize the difference
between deposits and circulation.
Q. You admit the banks keep a quantity of notes behind their counters
which do not come into circulation?—A. Yes.
Q. And therefore, no charge is made upon them?—A. I do not understand
you.
Q. You have a charge of 5 per cent on everything you put into the Central
Gold Reserve, against which you issue private notes?—A. Yes.
_Q. What quantities are kept ready for circulation, which does not actually
go into circulation?—A. That statement which the Association gets out every
month shows the quantity of notes which the bank has in its possession unissued
—quite a large volume.
Q. There can be an unlimited non-issue?—A. No limit to that. There is
a very definite limit to the issue, though.
Q. Referring to Section 61, sub-section 2; what steps do you take to see
that the bank—speaking now for the Bankers’ Association—do not over-issue
more than their unimpaired paid-up capital?—A. The Association has to depend
upon the returns made by the particular bank to the Association, in the first
instance, and there is, in addition to that, the inspection of which I have told
{Mr. Henry T. Ross.]
Aaa ROGER
BANKING AND COMMERCE 321
APPENDIX No. 14
you, namely, that an officer representing the Association examines the books
and the returns of all branches to see that the bank has not made a false return.
That inspection may take place any time. It is only required by the regulations
to be made once a year, but at any time the officer representing the Association
can go into the bank and see all its books, including the returns from all its
branches, which is the basis of its record of note issue, and check them up, to
see if they are in accordance with the returns the bank actually made.
Q. And yet, with that thorough inspection, is it not a fact that the Associa-
tion did not realize that the Home Bank had an impaired capital?—A. That
is different. I do not think that really concerns the question. The paid-up
capital of the Home Bank was impaired, as we now know, and the bank’s
officers made a declaration, for which they are liable, that it was not impaired.
Under the Statute the bank’s officers make a return to the Department and say,
“Our paid-up capital is so-and-so, unimpaired.” There is no statutory power
given to the Association to go behind that statement. We have to accept that
statement.
Q. Then is there anything to prove that inasmuch as the Home Bank
directors made a false statement, other banks may not have made false
statements, and so misled the Bankers’ Association?—A. In all the checking of
the circulation accounts of the banks, so far as the records go, there has been
no evidence that any bank has wilfully made a false return in that behalf—in
regard to its circulation.
Q. You had no evidence, I take it, as far as the Home Bank was concerned
since 1916, although they were in bad shape from that time on?—A. Yes.
Q. Therefore, it is possible that another bank might be in the same position?
—A. It is possible, but I do not think it is probable.
By Mr. Marler:
Q. Mr. Ross, the question of re-discounting and pledging was brought up
by Mr. Spencer as regards the Finance Acts of 1914 and 1923?—A. Yes.
Q. As a matter of fact, is not the same end gained by re-discounting and
pledging, under the circumstances?—A. Yes, the same thing is accomplished.
Q. It is really the substitution of one word for another?—A. Yes.
Q. Whether we use the word “re-discounting” or “pledging” with reference
to the banks and the Finance Act, precisely the same object is gained?—A. The
same results follow.
Q. You spoke about large legals being given by the Finance Department
to the bank?—A. Yes.
Q. Those are given for the purpose of convenience only?—A. Yes.
Q. Small legals could be given just as well, if necessary?—A. Yes, and are,
in practice, in order to suit the convenience of the banks.
Q. And these small legals could be put into circulation?—A. Yes, and are,
in fact. r
Q. And the large legals are issued for the purpose of convenience; nothing
more and nothing less?—A. The bank uses the bulk of the large legals it gets
under the Finance Act from the Finance Department to meet its obligations
in the clearing house. There are no issues of its own notes in that connection.
Q. But they could give small legals just as well?—A. Yes.
Q. And would, if you demanded them?—A. Yes.
By Mr. Healy:
Q. Mr. Ross, what is your business?—A. I am the Secretary-Treasurer of
the Canadian Bakers’ Association.
Q. How long have you held that position?—A. It is approaching eight
years.
(Mr. Henry T. Ross.]
322 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And what was your position before that?—-A. I was Assistant Deputy
Minister of Finance.
Q. For how long?—A. Ten years.
Q. And what is your profession?—A. I was a solicitor by profession.
By the Acting Chairman:
Q. A member of the Bar, I presume?—A. Yes. I practised my profession
for a number of years.
By Mr. Healy:
Q. In regard to a bank issuing notes, there are, as I understand it, only
two persons interested in the issuance of notes; the bank issuing them and the
Canadian Bankers’ Association?—-A. The members of the Association, yes.
Q. The Government has nothing to do with it?—A. The Government has
nothing to do with it excepting that returns are made to the Government like
at other returns.
Q. But they have no control whatever? They have not been given the
legal right— —A. Well, the Government has some control.
Q. If it has, let me know what it is?—A. If it develops that a bank has
over-circulated, the Government considers the case, and finds the bank has
over-circulated—
Q. That is a supposition. There is no legal method or legal machinery
by which they have control?—A. No.
Q. Under whose control are these notes issued?—A. Under the control of
the individual bank.
Q. And the Bankers’ Association?—A. The Bankers’ Association might
suffer if an over-issue was made.
Q. But it goes further than that; it is the law?—A. Yes.
Q. It is set out by statute?—A. Yes, the Bankers’ Association has the
control which I have already detailed to Mr. Spencer about procuring the
notes and keeping the accounts.
Q. Am I clear on the point that there are only two people——if you
wish to call them “people’—the bank and the Association, in control of the
issuance of notes? That is correct?—A. Well, coupling them is not exactly
correct, Mr. Healy.
Q. Well, they are the two engaged; I do not care whether you couple
them or not?—A. Yes, in the manner I have described.
Q. What is the foundation, in the first place, for the issuance of any
notes by the bank?—A. Paid-up capital.
Q. And it is further restricted to unimpaired capital, is it not?—A. Yes.
Q. Paid-up unimpaired capital?—A. Yes.
Q. Are you of the opinion that the Home Bank’s capital was exhausted
in 1916?—A. I only know what I saw in the Press. I would rather follow
what Commissioner McKeown said about that.
Q. That was the conclusion arrived at?—A. Yes, I understand the
liquidators said its capital was impaired in 1916.
Q. But you cannot agree?—A. I cannot disagree, because I have no
knowledge.
Q. If you cannot agree, would it be fair to say you disagree?—A. I do
not know whether I am called upon to say whether I agree or disagree.
Q. You are called upon now, because I am asking you?—A. That does
not necessarily follow that I should go through a process of mind.
Q. Is that your opinion?—A. I fully believe that the capital of the Home
Bank was very badly impaired.
[Mr. Henry T. Ross.]
BANKING AND COMMERCE 323
APPENDIX No. 1
fh Q. In 19167—A. Well, I don’t know just when. Quite a time before its
ailure.
Q. Then it is fair to say that since 1916 the Home Bank had in the
neighborhood of $2,000,000 in circulation that had no legal foundation for its
issuance?—A. I would not say that. I would not agree to that. I would
say that the notes, so far as the public were concerned, and so far as the
bank was concerned, had legal issuance.
Q. I understand you to say that the only foundation for legal issuance
was paid-up and unimpaired capital?—A. Yes.
Q. And there was none since 1916?—-A. So far as the forms are concerned,
the notes were legally issued—
Q. I am not speaking of the forms; I am trying to get at the fact.—A. I
will not agree that the notes were not legally issued.
Q. Well, would it be safe to say that they were legally issued, so far as
the paper issuance was concerned when there was no foundation in fact for
the issue?—A. The capital was impaired, and the Home Bank’s officers or
directors or manager improperly issued notes.
Q. That is quite true; there is no argument in that; that is established.
But the only foundation in this country for the issuance of notes is the amount
of paid-up capital unimpaired—A. There is the further foundation that the
assets of the bank are behind the legal.
Q. We are getting away from the point; that is not a legal right to issue
notes, the assets of the bank; it is the capital and unimpaired capital; there
is no doubt about that?—-A. No doubt about that.
Q. Is it fair to say that there were $2,000,000 in circulation that had no
real foundation for circulation?—A. That is an indefinite word. There was a
real foundation, because all the assets of the Home Bank were by law liable
for their circulation. I would call that a real foundation.
Mr. Garuanp: A legal foundation?
The Acting CHarRMAN: I do not think we need assist Mr. Healy.
By Mr. Healy:
Q. I think our minds are working along the same lines, but our words are
not?—A. I think so; I will try and be helpful to you, Mr. Healey.
Q. The law of this country gives certain people the right to issue notes.
Is that right?—A. That is quite right.
Q. And the only people are the chartered banks of Canada?—A. Yes.
Q. The only right they have to issue notes is their capital and to the extent
that it is unimpaired. Is that right?—A. Yes.
Q. That being the case, is it not fair to say that the Home Bank had no
right to issue notes since its capital was impaired?—A. It had no right to issue
when its capital was impaired.
Q. Then is it not a right conclusion that since 1916 there were $2,000,000
in circulation that it should not have had?—A. That is to say, if its capital
was impaired to that extent.
Mr. Marter: Take the $2,000,000.—
Mr. Heauy: I gave way to you once, Mr. Marler.
Mr. Maruer: My hon. friend is putting the witness in a position—
Mr. Hzary: The witness is able to take care of himself.
By Mr. Healy:
Q. We know now that its capital was gone in 1916; the liquidator has said
so?—-A. If the liquidator says so—
Q. He has. said so, has he not?—A. Yes.
[Mr. Henry T. Ross.]
324 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Now, I am going back again to my previous question. Since 1916 the
Home Bank had $2,000,000 in circulation that it had no right to have in cir-
culation?—A. If its capital were impaired to that extent the Home Bank illegally
issued these notes. :
Q. I thought we had concluded that its capital was gone?—A. I agree with
you, I will agree to that extent; you say so and I am willing to agree. I will
conclude with you that the Home Bank illegally issued its notes. :
Q. Correct. Now the other party to the transaction is the Canadian
Bankers’ Association?—A. Yes.
Q. The only other party that had any supervision?—A. Yes. The Govern-
ment had supervision.
Q. That is a visionary supervision that the Government had. The two
parties to the transaction were the two I have mentioned?—A. Yes.
Q. As a result, when the Home Bank failed, there were $2,000,000 of paper
illegally issued in circulation?—A. Illegally issued.
Q. In circulation?—A. Yes.
Q. And that became a first charge on the assets of the Home Bank?—A.
Yes.
Q. And as a result of that came out of the pockets of the depositors?—A.
I do not know.
Mr. W. F. Mactean: Among others.
By Mr. Healy:
Q. Not among others, because everything else was exhausted. That is the
final result?—A. That is your conclusion.
Q. I want it to be yours also—A. It is a conclusion of law and I am not
giving conclusions of law.
Q. It is a question of fact?—A. It is a conclusion of law, I submit.
Q. Well, we will try and make it a conclusion of fact. The depositors lost
55 per cent of the deposits?—A. Yes.
Q. And that loss amounted to a good deal more than $2,000,000.
By the Acting Chairman:
Q. Fifty-five per cent amounts to a great deal more than $2,050,000?
—-A. Yes.
By Mr. Healy: :
Q. Therefore, part of that loss is covered by the $2,000,000 in circulation?
—-A. It may be:
Q. If that is the answer, I will take it, but I thought I had led up to what
is a conclusion of fact.
The Actina CHarrMAN: A question of arithmetic.
Mr. Heaty: Yes, a question of arithmetic.
Witness: I wish to state what I reiterated before that if there is an im-
plication in the case of the Home Bank that because their executive made
false statements somebody else is liable, there can be no such conclusion. The
statute provides that the Home Bank executive shall make a declaration of its
unimpaired paid-up capital. The Bankers’ Association has to accept it. That
is the statutory provision. They have to accept that, and they must decline
to accept any further responsibility for any errors or false statements that the
Home Bank executive made.
Q. I understand that they are declining to accept responsibility; there is
no doubt about that. What we want to find out is whether they should accept re-
sponsibility. At any rate that was the result, that the depositors lost $2,000,000
fMr. Henry T. Ross.]
BANKING AND COMMERCE 325
APPENDIX No. 1
on account of the illegal issue of currency. You say the Bankers’ Association had
no knowledge of the condition of the Home Bank?—A. The Bankers’ Association
had no knowledge, no.
Q. Had any members of the Association knowledge?—A. I cannot say.
Q. I suppose that the members of the Bankers’ Association knew, as every
one else knew that the Home Bank had mortgaged all its real estate to Strauss
& Company of New York?—A. I suppose that it was public knowledge they
knew of it in the way that everybody else did.
Q. I infer that because when anybody else gives a mortgage they know
about it?—A. It was published in the records.
Q. And when one of their own members gave a mortgage of all their real
estate, I imagine that the other members knew about it?—A. It is quite possible,
probable, I think.
Q. Did that not lead them to inquire whether the assets of the Home
Bank had gone?—A. I had not knowledge.
Q. Should it not have?—A. I cannot say.
Q. Then this is the condition, and we have had no remedy suggested, that
a bank without capital can issue to the extent of what its capital appears to be
on paper and no one has any control over it?—A. A bank must have had capital
in the first instance.
Q. Oh, yes?—A. It is possible under the existing law for a bank to have
had capital and to lose it and to continue issuing its notes against that capital.
Q. To the loss of the final man, who is the depositor?—A. To his loss, if
you so put it.
Mr. W. F. Mactean: There is no protection under the existing law.
By Mr. Healy:
Q. To put it as Mr. Maclean puts it, there is no protection under the
existing law for the depositor?—A. If the assets are sufficient, there is ample
protection.
Q. We have just gone through a little experience, where the assets were not
sufficient?—A. In this particular case, yes.
Q. And the limit may be $3,000,000, $4,000,000, $6,000,000 or $10,000,000?
—A. Any supposition you choose to make.
Q. Depending on the paper capital of the bank. What remedy has the
Bankers’ Association to offer for that condition?—A. I do not think it is neces-
sary under the law to make any suggestion or offer any remedy.
Q. They are perfectly satisfied with the condition?—A. I have no know-
ledge of what they think of the question you put.
Q. I thought they act through you?—A. No, I cannot say that they take
quite that position.
Q. They are not worrying about this position which exists?—A. They think
there is no obligation upon them to pay somebody else’s debts.
Q. But this duty was assumed cheerfully by the Bankers’ Association?
—A. It was put upon them by statute.
Q. And they accepted it?—A. They had to.
Q. And they have carried it along for years?—A. Yes.
Q. When they accept a duty of that kind and do the work put upon them by
the country, do you think there is no obligation upon them without regard to
who suffers?—A. If they discharge their statutory obligations, I think they have
done their duty.
Q. Do you think that is a satisfactory condition?—A. I would not like
to say.
Q. What do you think after this morning’s evidence?—A. That is a per-
sonal opinion.
(Mr. Henry T. Ross.]
326 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. You are an expert; what is your personal opinion?—A. I must disclaim
being an expert.
Q. There is none if you are not an expert.
The CHamrMAN: Perhaps he thinks that the definition of an expert is an
ordinary man a considerable distance from home.
By Mr. Healy:
Q. Do you really think that is a satisfactory condition?—A. I would not
like to express an opinion, Mr. Healy; I certainly would like to oblige you.
Q. I will say that the men who paid the $2,000,000 do not think it is a
satisfactory condition?—A. I would hardly think it a satisfactory condition
that one individual should be liable for the debts of another.
Q. This goes deeper than that. This is a condition that existed for eight
years, when $2,000,000 of worthless paper, so far as a legal issue is concerned,
was floating around this country and finally came out of the pockets of the
depositors. Is that a satisfactory condition?—A. It is very unsatisfactory, I
should think.
By Mr. W. F. Maclean:
Q. I would like to ask Mr. Ross whether he considers that the law should
not be amended, in view of what has come out this morning, for the protection
of the public. It has clearly come out that this improper issue took place and
was circulated for years. Now it comes out that there was an impairment
of the capital and that the issue was unjustified. That being the case, does
Mr. Ross, as Secretary of the Bankers’ Association, not think that the law
should be changed in that respect, and that somebody should be made respon-
sible to check off the issue by knowing from time to time what the actual im-
paired capital of the bank is?—A. Well, Mr. Maclean, there have been remedial
measures introduced into the Bank Act of 1923, and there is the additional
remedial measure proposed by the Acting Minister of Finance at the present
session, which in my judgment should go a long way to prevent a recurrence
of what happened in that particular case.
Q. But to check them off. The Bankers’ Association has a function to
perform, and somebody should function?—A. Their auditors should function,
and the inspector-general, if he is appointed, should function in this con-
nection.
Q. You have not got the point I am making, but my statement is in the
evidence anyway. We will come to another question. In your previous
examination you referred to somebody re-discounting, or making advances
against security. Who does that?—A. Under the Finance Act of 1923, a bank
only can procure an advance—
Q. From whom?—A. From the Minister of Finance.
Q. But they do not have to go to the Minister of Finance to get their
bank issue, the issue against their capital. To whom do they go in regard
to that?—A. That is a statutory right given to banks.
Q. Without anybody checking them up?—A. Oh, yes, in the first instance,
when the bank goes to the Minister to get a license to do business with the
Treasury Board, it must furnish evidence that it actually has its capital paid
up in cash. Then, from time to time the officers of the bank make declarations
as to the amount of the paid-up capital. That under the statute forms the
basis for the issuance of its own currency by the bank.
Q. But there is nobody responsible for checking off that statement of the
directors that their capital is unimpaired, at present?—A. Oh, yes, there is.
Q. Who is it?—A. The auditors of the bank.
Q. But who are the auditors of the bank? They are the appointees of
{Mr. Henry T. Ross.]
BANKING AND COMMERCE 327
APPENDIX No. 1.
the bank. Should not the responsibility be on the Minister or upon his Deputy,
for instance?—A. The Minister is nominally responsible to see that a bank’s
capital does not go by the board, and that a bank does not carry on as the
Home Bank carried on.
Q. Meantime, there is no protection for the public in the matter of the
issue of notes by a bank?—A. That raises the large question as to whether
the note-holders have a superior right to the depositor. It is generally con-
ceded that the note-holder has a superior right to the depositor.
Q. Why should he have?—A. He is an involuntary creditor.
Q. You said that a bank had the right to be a member of the Bankers’
Association?—A. No, it has not the right; it is made a member by statute.
Q. Then it is a member?—A. Yes.
Q. Is it also a member of the clearing house?—A. No.
Q. Who grants the privileges of the clearing house to an individual
bank?—A. The clearing house is a voluntary organization entered into by the
banks in a particular city, and the members determine who shall have the
privileges of the clearing house.
Q. And they examine into the standing of the banks as to whether they
should be allowed the right to the clearing house?—A. I think that any bank
which is carrying on under the Bank Act has always been conceded the clearing
house privileges.
Q. Was there ever a refusal of membership in the clearing house to any
bank heretofore?—A. I have no knowledge.
By Mr. Hanson:
Q. I should like to ask Mr. Ross a question with respect to the control
of the issue of bank notes. Are there not provisions in the Bank Act which
give the Government a certain control over the issue of the banks and certain
penalties with respect to over-issue?—A. Yes.
Q. Subsection 16 of section 61 and the penalty clauses contained in section
135?—A. Yes.
Q. Is it within your knowledge that the Government does exercise control
under these sections?—A. Yes.
Q. And imposes penalties on the banks if by inadvertence or design, it
may be, they have over-issued their circulation?—A. That is correct.
Q. Is that a frequent occurrence?—A. Not a frequent occurrence.
Q. Is it not the fact that the banks as a rule are under rather than over-
issued?—A. Yes, they contrive to be well under.
Q. Under the Finance Act of 1914, as amended in 1923, all banks have
the power of rediscounting customers’ paper. Is it usual for the banks to avail
themselves of that privilege, or do they ask and obtain advance on the collateral
of their own security?—-A. The latter, usually.
Q. On the collateral of their own security, usually?—A. Yes.
Q. Do they ever avail themselves of the other option, namely the redis-
counting privilege?7—A. The banks are accustomed to get advances against
grain paper.
Q. That, of course, would be rediscounting, pure and simple?—A. I am
not sure that it takes the form of rediscounting. It is the same in effect. There
is no difference in effect.
Q. What happens is, they put up with the Finance Department the grain
certificates, which in law are evidences of the title of ownership, and against
which they have made advances to customers?—A. Yes.
Q. As a rule they are certificates on grain in transit or storage?—A. Yes.
{Mr. Henry T. Ross.]
328 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By the Acting Chairman:
Q. Does it not mean that they rediscount the actual paper which the
customers have given?—A. I do not think it is the practice. There may have
been instances, but I would say that taking the volume of business presented
under the Finance Act, rediscounting or making advances against customers’
paper is negligible.
Q. It could be done?—A. It could be done.
By Mr. Hanson:
Q. You have instanced grain certificates. Are these in fact the property
of the bank or merely titles to the bank?—A. I think that in law they are the
property of the bank. Yes, strictly they are the property of the bank. The
title passes to them; it is the actual property of the bank to do with it as they
see fit.
Q. Therefore, they are pledging their own property?—A. Yes.
Mr. Sates: This raises a very important point, the question of whether
a farmer has the right to part with his grain ticket. If Mr. Ross says it is
the property of the bank entirely, I would like to know—
By Mr. Hanson:
Q. They are offered in security or in trust?—A. Yes.
Mr. Sates: When a farmer has grain in store and the warehouse certi-
ficate is issued, he has not parted with his grain and for the bank to pledge
that or construe it as belonging to them is altogether wrong.
Mr. Hanson: I think there is a little confusion there. I do not think
that any warehouse man would ever pledge to the bank or sell under the certifi-
cates grain which is in storage and is not the property of the warehouse man.
The Actinec-CHArRMAN: The question, I think, that Mr. Hanson is deal-
ing with is where warehouse receipts represent the ownership of grain. Let
us say it belongs to a grain merchant, and the grain merchant goes to his bank,
borrows money and hands over the warehouse receipt. The bank, on the other
hand, takes the warehouse receipt to Ottawa and pledges it to the Department
at Ottawa under the Finance Act of 1923 and gets an advance in Dominion
bills against it.
Mr. Coorg: Has the bank bought that grain? Does it own the grain?
The Actine-Cuairman: If the bank has lent money on the grain and has
obtained the warehouse receipt, it is a document of title, I presume, and they
can take that document of title and rediscount it with the Finance Depart-
ment.
Mr. Hanson: Just the same as a bill of lading.
The Actinc-CHAIRMAN: I would think so.
By Mr. Shaw:
Q. You have told us that the Bankers’ Association knew nothing of the
condition of the Home Bank before its failure, as an Association?—A. Yes.
@. That is correct?—A. Yes.
Q. Was the Home Bank ever discussed at any of the Association’s meetings?
—A. I think I am quite safe in saying that I never heard it discussed.
Q. Would you have any record if it was discussed?—A. I would.
Q. Have you examined your records to see?—A. There was not any dis-
cussion at the meetings of the Home Bank’s standing.
Q. You have told us of the power of the Bankers’ Association respecting
note circulation?—A. Note circulation accounts.
{Mr. Henry T. Ross.]
-
BANKING AND COMMERCE 329
APPENDIX No. 1
Q. At the bank?—A. Yes. ‘
Q. Where do you get that power? What subsection of section 124 gives
you the power? Is it subsection one?—A. Yes.
Q. That is the only power?—A. Taken together. The Association may
make by-laws for “The supervision of the making of the notes of the banks
which are intended for circulation, and the delivery thereof to the banks.”
Q. Under that section, have you any authority—A. Also “The inspection
of the disposition made by the banks of such notes”, and “The destruction of
notes of the banks.”
Q. Have you any authority under that section, or any other section—
has the Bankers’ Association any authority to ascertain whether or not the
circulation of a bank is legal or illegal?—-A. The Act provides that a bank may
circulate notes up to its unimpaired paid-up capital. The Act further provides
that the bank shall make a return to the Government of its unimpaired paid-
up capital every month. That fixes, so far as the Association is concerned,
what is the unimpaired paid-up capital of a bank, and they have no power to
go behind it.
Q. Would you answer my question; the Bankers’ Association has no
authority to ascertain whether the circulation of a bank is legal or illegal?—A.
I say it has no authority to determine whether the capital of a bank is impaired
or not.
Q. You have been in the Department of Finance for ten years; who is the
party in the Department charged with the particular duty of seeing that the
banks keep within the legal limits, so far as note circulation is concerned?—A.
A return must be made by the bank to the Department of its circulation every
month.
Q. Who is the officer in the Department who is charged with the function of
seeing that the banks keep within their legal limits?7—A. Do you mean, is
there anybody charged with the legal obligation to determine whether a bank’s
capital is impaired or unimpaired?
Q. Yes—A. There is no provision in the statute, so far as I see.
Q. Was there any official in the Finance Department when you were there?
—A. I am speaking of the statutes.
Q. I am talking now of the administration of the Finance Department?—A.
The Finance Department receives what are equivalent to sworn statements by
the banks’ officers.
Q. Now it is perfectly clear, so far as the Home Bank is concerned, that they
undoubtedly exhausted their capital—A. They made false returns and are liable
to the penalties—the men who are responsible—provided in the Bank Act.
Q. They may go to jail?—A. That is it.
Q. But that does not save the depositors; half of the bankers in the country
in jail would not save the depositors?—A. No.
Q. The fact is that in the Finance Department, so far as your knowledge
goes, no steps were taken or have been taken by anybody to see that the banks
kept within the legal limits, so far as note circulation is concerned.—A. If you
mean that somebody in the Finance Department should have made an assessment,
examined every security of the bank and every obligation to see whether its
capital was or was not impaired, there is no statutory provision for such a
proceeding.
Q. Do you know now from your knowledge whether the capital of any
existing bank is impaired or not?—A. I have no knowledge; so far as my know-
ledge goes, none is impaired,
Q. You have no knowledge in the matter at all. You are in the same
position as I am in that regard?—A. I have the same opportunities as you have.
(Mr. Henry T. Ross.]
330 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Do you know who can tell us whether or not the capital of any bank in
Canada is impaired?—-A. You can examine the officers of the bank, I presume.
Q. They are the only people who could tell us?—A. The auditors, I should
think.
Q. Do you think it is important that there should be some control, more
adequate control than exists now over those issues, in view of those circum-
stances?—A. There has never been, so far as our records show and my knowledge
goes, any circulation by a bank differing from its published returns. No false
statements of the amount of circulations outstanding have ever been made,
so far as I am aware.
Q. That may be perfectly true, and yet it may be entirely illegal; the
circulation may be nevertheless entirely illegal. Is that not so?—A. It may
be in the case of the Home Bank that false returns may be made as to the
amount of unimpaired paid-up capital.
Q. So far as you are concerned, all you do is to ascertain what the circula-
tion is outstanding?—A. That is it.
Q. And you have no concern whether or not the capital of the bank is
impaired, or whether or not the bank has to its credit anything in the Central
Gold Reserve which would justify a further circulation?—A. There is a return
from the Central Gold Reserve every month as to the amount the bank has
there to justify its circulation.
Q. Can you tell us how much is deposited in the Central Gold Reserve?—
A. Something about $60,000,000. I think.
Q. Is that more or less than last year about this time?—A. I cannot say
offhand.
Q. You have no knowledge of whether the amount there is decreasing or
increasing?—A. It is varying. I saw a comparative statement in the news-
papers; I think I have it here; I do not know whether it covers that point. It
states that the Central Gold Reserve at the end of April 1924 was $65,600,000.
A year ago it was $9,000,000 less.
Q. Now, Mr. Ross, the duties of the Bankers’ Association are stated in
the Act of Incorporation with such provisions as we find in the Bank Act?—A.
Yes.
Q. And in no other place?—A. In no other place.
Q. Have you any control over the banks in any way, shape or form?—A.
The circulation is the only—
Q. That is the only control?—A. That is the only control, yes.
Q. Does the Bankers’ Association exercise any control ‘other than that—
for instance, with regard to the rate of interest?—A. You mean the rate charged
to borrowers?
Q. No, the rate allowed to depositors?—A. It has been the practice from
before my time—I have no knowledge of how it originated—to allow 3 per cent
on deposits.
Q. The Home Bank allowed more, did it not?—A. I don’t know, I am
sure.
Q. Did it at the outset —
The Actinc CuatrMan: Is that by agreement between the parties?
The Witness: I may say that is not universal either. There is one bank
at least that allows more.
By Mr. Shaw:
Q. Which one is that?—A. The Weyburn Security Bank. There is no
compulsion about it. Any bank may allow what it likes, and the Weyburn
Security Bank exercises that privilege and allows 4 per cent.
[Mr. Henry T. Ross.]
BANKING AND COMMERCE 331
APPENDIX No. 1
Q. So there is no arrangement, as far as the Bankers’ Association is con-
cerned?—A There may have been in the past, but it is more than 20 years ago.
I know that is the practice.
Q. Is there any understanding regarding the rate to be charged borrowers?
—A. There is no general arrangement. }
Q. Is there any specific arrangement?—A. Yes, there have been on certain
classes. One small class of municipal loans charges 54 per cent, I think. It
applies to a very small percentage of the business of the banks.
ne You mean they shall allow a rate of 54 per cent—A. No, charge that
rate.
Q. Do all the banks charge that?—-A. I am not sure.
Q. Is that rule in effect now?—A. Rules are sometimes nominally in effect,
but sometimes more honoured in the breach than in the observance.
Q. I could imagine many municipalities and school districts would be glad
to know the rate is 54 per cent?—A. Not less than 54 per cent.
Q. That seems to me like a very safe rule?—A. That only applies to the
smaller municipalities; there is no rule about the larger ones.
By Mr. Good:
Q. There is no limit to the maximum?—A. No.
By Mr. Shaw:
Q. Can you tell me, Mr. Ross, whether or not the Department have ever
assessed any fine against any bank for exceeding their circulation?—A. I think
it has.
Q. Do you make that answer from your own knowledge?—A. I have some
knowledge—
Q. For instance, during the last year?—A. I think there was. I have heard
there was one case last year.
Q. Do you know if the Home Bank was assessed anything?—A. No, I have
never heard of the Home Bank being assessed anything.
Q. You have only heard of one case?—A. Yes, that is, in the last 10 years.
I don’t know, but there must have been.
By Mr. Hughes:
Q. Did the depositors in the Home Bank lose money because that bank
had the privilege of issuing its own notes or because the capital of the bank was
impaired?—-A. The depositors in the Home Bank lost money because the assets
of the Home Bank were not sufficient in the bank to pay the depositors.
Q. If the inspection of the Home Bank had been sufficient to prevent the
bank from doing business with impaired capital, would the losses of the depo-
sitors have been greater because the bank had the privilege of issuing notes?—A.
No, they would not. If there had been proper inspection I quite agree there
would not have been losses.
Q. So far as you know, and I believe it is generally understood, in all the
returns that the bank have made to the Government there has never been a false
return in regard to the issuance of notes?—A. So far as I am aware that is quite
correct; there has never been a false return to the Government in regard to notes
issued.
Q. But there have been false returns made with regard to the condition of
the bank?—A. With regard to its capital.
By Mr. Irvine:
Q. You have no more reason for knowing about its issue than Mr. Hughes?
A. I think IT have.
[Mr. Henry T. Ross.]
1—34
332 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Beyond the returns they made to you? That is the impression you gave
me a few minutes ago from your answer?—A. I have had a good deal of rela-
tionship with the banks more or less during the last 18 years. I do not say
it in disparagement of Mr. Hughes, but perhaps I have had larger opportunities
of knowing what the conditions are.
Q. You have?—A. Probably so.
By Mr. Hughes:
Q. Primarily the depositors of the Home Bank did not lose hecause the
Home Bank had the privilege of issuing notes against its capital?—A. The
Home Bank, of course, got consideration for all the notes it issued, and the
depositors got the benefit of that.
Q. Was the privilege of issuing notes the primary cause, or any cause—I
think I can go that far—of the failure of the Home Bank?—A. I don’t think
so. J think that is a correct statement.
Q. And if the inspection of banks is sufficient to keep the banks of Canada
solvent the depositors will not lose and cannot lose because of the privilege of
note-issuing?—A. I think, with those premises, your conclusion is correct.
Mr. Hucues: I think there was some confusion in the minds of the Com-
mittee that the note issue itself—
The Witness: Was the primary cause of the failure?
Mr. Hugues: No, was a weakness in the bank system of Canada.
The Wirness: I do not think the privilege of note-issuing affects the
solvency or insolvency of the bank.
By Mr. Euler:
Q. I think it is clearly established that it is possible for a bank to issue
notes against capital which is really non-existent?—-A. That is evident, yes.
Q. Now, in your opinion, will the proposal of the amendments as made
by the Minister of Finance prevent the continuance of the practice which I
have described?—A. I would think that the proposal of the Minister of Finance
will go a long way toward preventing a recurrence of what has happened in the
case of the Home Bank.
Q. Have you any suggestion to make that would be an improvement
upon the proposal made by the Minister of Finance?—A. I have not.
By Mr. Healy:
Q. I understand, Mr. Ross, that your conclusion was that the issuance
of notes by the Home Bank did not increase the loss of the depositors?—A.
Did not increase the loss of the depositors? My reasons for that answer,
Mr. Healy was—
By the Acting Chairman:
Q. Was that your answer—first of all?—A. Yes.
By Mr. Healy:
Q. I think I understand your reason—A. I would like to couple with that
my reason for that statement, namely, that the Home Bank got consideration
for every note it issued, and therefore, the depositors were, to that extent
protected.
Q. Would get consideration?—A. Yes.
Q. I want some light on that—A. I will illustrate that. When a man
borrowed from the Home Bank and gave his note, he got, we will say, $100
of Home Bank notes. Then the Home Bank had that man’s note for $100
and that was security for the depositors to that extent.
[Mr. Henry T. Ross.]
BANKING AND COMMERCE 333
APPENDIX No. 1
Q. You mean to conclude that this bank could collect the assets of the
public and give nothing for them?—A. Could collect—
Q. Yes, that is the conclusion that must be arrived at?—A. I don’t quite
follow you.
Q. The paper was worthless, legally?—A. If the executive of the Home
Bank handed out its notes for worthless paper it was indeed a misfortune.
Q. The bank had $2,000,000 of worthless paper it was handing out for
good paper of the people?—A. We must assume they got good paper for it.
Q. It is agreed, I think, that $2,000,000 was illegally issued by the Home
Bank?—A. Yes. The officers made false returns—
Q. You do not have to admit these men were crooks and so on. I will
admit all that. That does not enter into the argument, that they made false
returns and all that sort of thing. I do not agree with your conclusions. When
this bank failed there was $2,000,000 of notes paid for by the depositors?
—A. Paid for by the persons who got them.
Q. But it comes out of the pockets of the depositors finally?—A. Both.
Q. No, it comes out of the pockets of the depositors finally—that $2,000,-
000?—A. That might have been the result.
Q. It was the result, was it not? Let us have definite conclusions, and
not guesses. That was the result?—A. It might have been.
Q. Well, was it?—No, I cannot admit that. I will not admit that for all
the paper issued by the Home Bank nothing was received in return. I cannot
make that admission because I know it is not the fact.
Q. The amount available for the depositors was reduced by the exact
sum of the circulation of the Home Bank then in existence?—A. The depositors
have already got some money out of the Home Bank and a part of that no
doubt came in exchange from notes that the bank handed out to the public.
Q. I see the point you are trying to make, but I do not agree with it?—A.
I cannot help that, Mr. Healy.
Q. Now, there was a loss to the depositors as to the note circulaton, but
we do not agree on the amount. Can we go that far?—A. I do not say a
loss to the depositors. I say that by statute the assets of the bank are liabili-
ties to redeem the notes—that resulted in a loss to the depositors.
Q. That resulted in a decrease of the assets to the exact amount of the
note circulation that was out the day the bank failed?—A. I am not ready to
admit that, because when the bank handed out its notes it got paper in
return on which the liquidator has realized.
Q. And that paper was an asset the day the bank failed?—A. Yes.
Q. And that was in the sum total of the assets?—A. Yes.
Q. And that was reduced by the exact amount of the bills in circulation?
—A. Yes.
Q. That is correct, is it not?—A. Yes, the sum total of the bills in circula-
tion is a first lien upon the assets.
Q. Absolutely; but the sum total of the assets of the Home Bank on the
day of the failure was decreased by the exact amount of the circulation of the
Home Bank?—A. Not “decreased.” I would not put it that way. The Statute
makes the notes a first lien upon the assets of the bank, and we cannot quarrel
with the Statute.
Q. They were paid out of the assets?—A. Yes.
Q. I should say the assets were decreased if the amount was paid out of
them—
The AcTING CHAIRMAN: May I interject a question?
[Mr. Henry T. Ross.]
1— 343
334 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By the Acting Chairman:
Q. Supposing the Home Bank instead of having made very bad invest-
ments had made very slow investments; they were perfectly good but were so
slow that the bank had to shut its doors, and supposing the bank was not im-
paired at all. Under those circumstances when the creditors of the bank came
to file their claims would they not have had to answer to the claim first of the
frozen capital of the bank plus all the other assets of the bank?—A. Not all
capital, Mr. Chairman. The depositors would not have had to answer for the
frozen capital.
Q. Would they not have had that to levy against?—A. Yes, as a result.
Q. Well now, is it not a fact that there were $2,000,000, let us say, of
bank notes outstanding without any real capital to back it, does that not reduce
their total resources against which they can levy for that amount?—A. I cannot
admit it quite that way, Mr. Chairman. The assets of the bank were increased
by what the bank got in exchange for the $2,000,000 of notes it handed out,
so it is not correct to say that the assets of the bank were reduced, in the sense
you put it, by the $2,000,000 of capital. The assets were supplemented by the
proceeds from the $2,000,000 capital handed out.
By Mr. Healy:
Q. The $2,000,000 was really there when the bank was started—it was real?
—A. I assume so.
Q. And that $2,000,000 of real money— —A. Was lost.
Q. And the $2,000,000 of worthless paper was exchanged for good securities
belonging to the people?—A. Yes.
Q. So that having lost the real money and gathered in the people’s securi-
ties— —A. No, not the people’s securities; they were the bank’s.
Q. They were the bank’s when they exchanged this worthless paper for
them?—A. When they got consideration for it there was that much more in the
assets of the bank.
Q. Anyway, it had already been lost and it was not replaced, so there was
not that much more. The real money at the back of the bills was lost and the
real securities were exchanged for paper which had become worthless?—A. The
holders of these bills gave consideration for them.
Q. I understand that, but the point vou make I do not think is sound
because the capital was there representing the paper, and was lost?—A. I did
not say the capital was lost.
Q. Had $2,000,000 of Dominion notes been in circulation by the Home
Bank instead of $2,000,000 of the Home Bank notes, there would not have
been this loss?—A. No, it would not have been lost.
By Mr. Marler:
Q. Mr. Healy, in his examination, Mr. Ross, was considering a point that
the depositors lost substantially $2,000,000 by reason of the circulation of the
Home Bank having reached that amount?
Mr. Irvine: That is clear.
Mr. Marurr: That is not as clear as you think it is.
By Mr. Marler:
Q: And Mr. Healy endeavoured to prove—or make you commit yourself,
that $2,000,000 was improperly used. Now my question is this—A. I did
not say “improperly used.” I said that insofar as the Home Bank officers
are concerned they made an improper issue. So far as the other banks are
soncerned, the issue was regular.
{Mr. Henry T. Ross.
BANKING AND COMMERCE 335
APPENDIX No. 1
Q. As regards the figures: You use them simply as tentative figures ?—
A. That is all.
Q. Nothing more and nothing less? You do not for a moment commit
- yourself to say that $2,000,000 of note circulation was improperly put into
existence?—A. No.
Q. You simply use that figure in comparison as to how the capital of the
bank was impaired?—A. Quite so.
Q. And your meaning is that there was a certain circulation put into
existence to the extent that the capital of the bank was impaired?—A. Yes.
Q. And the $2,000,000 was simply a figure for the sake of argument?—
A. And the consideration the bank got for the $2,000,000 was among the assets
of the bank.
Q. Now, let us assume that the $2,000,000 was issued as it was issued, and
$2,000,000 of the bank’s circulation was then acquired by the bank and put into
circulation with the public?—A. Yes.
Q. The bank in putting that circulation into existence must have put it
out for a certain purpose?—A. A certain consideration.
Q. In other words, for every single dollar of that circulation something
was acquired on behalf of the bank?—A. Yes.
Q. An asset was acquired for the bank?—A. Correct.
Q. Therefore, if a certain point, all these assets were good—all those
assets had been good—they would have offset that circulation?—A. They would.
Q. And there would have been no possible loss to the depositors at all?—
A. No possible loss at all.
Q. Now, in the course of this examination—
Mr. Keiiner: I am rising to a point of order. I submit this is out of
order. We have witnesses here whom we are supposed to question for informa-
tion. Members of the Committee come here and take exception to some
answers that are given, and then try to disprove the point by asking questions
of the witness. That is carrying on an argument between members through the
witness.
Mr. Maruier: There is no point of order there. However, I am willing to
accept the ruling of the Chairman.
The Actinc CHarrMAN: I think there is a tendency on the part of these
questioners to endeavour to prove their particular—I will not say foibles—but
particular points of view out of the mouths of the witnesses. Mr. Marler has not
transgressed any further than some of the others, so I cannot rule him out of
order. I would suggest, however, that we endeavour to get the view points of the
witnesses rather than to confirm our own.
Mr. Maruer: What Mr. Healy was attempting to do was to tie Mr. Roxs
down to a certain amount. That evidence is on record, and I think is not correct.
The Witness: I have already made the point with Mr. Healy that for
every dollar of circulation that the Home Bank handed out, and which is now a
charge against the assets of the bank, the Home Bank received consideration.
By Mr. Marler:
Q. That is what I wanted to make clear to the Committee, that for every
dollar’s worth of notes put into circulation by the Home Bank, there was a sub-
stantial asset acquired?—A. Yes.
Q. I want to make this point clear, and I would ask you to give your answer
“Yes” or “No,” if you can answer as briefly as that; it is not a question of circu-
lation at all which led to the failure of the Home Bank?—A. It was not.
Q. Your answer is “No?”—A. Yes.
(Mr. Henry T. Ross.]
336 ie SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Does it occur to you to this extent that the fact of the bank having a cir-
culation is an actual asset to the depositors and not a loss, for this reason, that
where there is a gain made in circulation there is a profit accruing to the bank,
and that is an asset behind the depositors?—A. It is an advantage to the
depositors. ‘
Q. In other words, circulation is an advantage to the depositors?—A. Yes.
Mr. Irvine: To the extent of $2,000,000?
Mr. Marurr: Not at all.
By Mr. Marler:
Q. In other words, a bank having this privilege as regards circulation, if it
is properly used, acquires a benefit, and that benefit must necessarily be passed
on to the depositors—provided it is properly used? Is that right?—A. That
would be the result.
Q. The Home Bank unfortunately did not use it properly, and did not
acquire sufficient assets by reason of its circulation, and the assets were im-
proper assets, and improper losses were made?—A. Quite so.
Q. This circulation was lost—was thrown away?—A. I do not know to
what extent. That would be a matter for investigation. I suppose that a very
substantial part of the present assets of the Home Bank was acquired through
the issue of the circulation.
_ Q. But if reasonable and proper assets had been acquired, this is at least
a reasonable supposition— —A. There would not have been any losses to the
depositors at all.
Q. If they had been good business assets, there would have been an actual
gain to the depositors?—-A. There would have been, yes.
Q. Can you see, Mr. Ross, any possible advantage, as regards the deposi-
tors, of Dominion notes being substituted for this bank’s circulation?—A. No,
because to get the Dominion notes would have taken the exact equivalent away
from the depositors.
Q. In other words, the depositors would suffer in the event of the circula-
tion privilege being taken away from the bank?—A. Yes.
Q. Your answer is yes?—A. Yes.
By Mr. Healy:
Q. I agree, Mr. Ross, with your statement, but had not the capital been
lost the assets would have been $2,000,000 greater?—A. Of course, if the Home
Bank had not made losses, the assets would have been greater.
By Mr. Irvine:
Q. Mr. Ross, are you appearing here in an official capacity as a representa-
tive of the Bankers’ Association?—A. I am appearing here because the Com-
mittee asked me to.
Q. And you are in the witness box, so to speak, this morning, because
you were asked— —-A. Yes.
Q. But is your appearance in this Committee from time to time as an
official of the Bankers’ Association?—A. I am an official of the Bankers’ Asso-
ciation, and I am here looking after the interests of the members of the Associa-
tion. I cannot say that I represent the Association for every purpose, nor I can-
not bind the Association by my statements, nor the members of it.
Q. Then the Bankers’ Association has some decided interest in what takes
place in this Committee?—A. Of course. I hope it is not denied,
Q. No. Have the Bankers’ interests been very well safeguarded, so far, this
year—to your satisfaction?—A. That is not a question upon which I would
care to venture an opinion.
(Mr. Henry T. Ross.]
BANKING AND COMMERCE 337
APPENDIX No. 1
Q. Have you any assistants with you, Mr. Ross?—A. What do you mean?
Q. Are you the only gentleman in this Committee Room representing the
Bankers’ Association?—A. So far as I know, I am. We have employed counsel.
Q. You have counsel here?—A. We have counsel employed.
Q. Just one counsel?—A. We have two or three.
Q. Would you care to say who they are?—A. If the Chairman deems it
relevant.
The Actrnc-CuarrMaAn: I do not see why they should not be known. It
is a perfectly reputable business to act as counsel before a Parliamentary Com-
mittee.
The Witness: Mr. Geoffrion is retained by the Association for the pur-
poses of this Committee. We also have the usual Parliamentary counsel,
Colonel Thompson, Mr. Daly, and Mr. Robert Laurier.
By Mr. Irvine:
Q. Are they very highly paid, Mr. Ross?
The Actine-CHAIRMAN: Surely that is not relevant.
Mr. Irvine: I do not care whether they get a million dollars a minute,
what I want to get at is how they are earning their money because they have
not said anything here, and if they have not said anything, I want to know
what they are doing.
Hon. Mr. Ross: They are listening.
The Actine-CuHamrMan: Don’t press that question.
By Mr, Irvine:
Q. They have not made any representations to this Committee, have they?
—A. The Committee denies to persons appearing before it the privilege of
being represented by counsel before the Committee.
Q. Is it part of their duties as counsel for the Bankers’ Association to act
as whips in the case of a vote being taken in the Committee?—A. I do not
think that is either fair or relevant.
Q. It is very relevant to me?—A. It may be, but I do not think it is to the
Committee at large.
By the Acting Chairman:
Q. Do you decline to answer, Mr. Ross?—A. I say it is not relevant, Mr.
Chairman.
By Mr. Irvine:
Q. Relevant to what?—A. To the issue before the Committee, namely
whether this Committee could make recommendations to safeguard the
interests of depositors. That is the question before the Committee.
Q. But have you not whipped up people to vote against the proposals—
Mr. Hueues: Mr. Chairman, that is an improper insinuation against
the members of this Committee.
Mr. Irvine: Well, Mr. Chairman, if the witness does not wish to answer
that question, I will not press it.
By Mr. Irvine:
Q. Would you care to say in what way these counsel are serving the
Bankers’ Association in this Committee? What are their specific duties?—A.
I will submit that is not relevant to the question before the Committee, namely,
what measures can be suggested for improving the Bank Act and safeguarding
the interests of depositors.
(Mr. Henry T. Ross.]
338 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The Actinc CHatrman: My ruling on the question would be this: The
witness has been asked whether they are represented by counsel, and he tells us
that they have four counsel representing them. The witness is asked—
Mr. Irnvinn: What is their specific duty?
The Actinc-CHAIRMAN: What is their specific duty? He declines to
answer, and I think we might leave it at that. If those gentlemen are here for
a purpose which their employer declines to explain, I do not think we need press
that any further.
By Mr. Irvine:
Q. Just one more question. You stated a few moments ago that the pro-
posals made by the Minister of Finance would go a long way to safeguard
depositors in the future. Does that mean that it does not go quite all the way?
—A. We have heard testimony before this Committee to the effect that no
system of inspection will absolutely prevent bank failures and possible loss
to depositors. That is my reason for making a qualified statement.
Q. Would you care to say in what way, in your opinion, it will safeguard
depositors to any extent?—-A. I think I can be quite frank about that. If an
officer with the proper qualifications undertake this duty I cannot conceive of a
bank getting into the hopeless condition into which the Home Bank got. There
is power in the Minister’s proposals that as soon as this officer is satisfied that
an institution is insolvent, he shall make a report to the Minister, and the
Minister is given the power to have a curator put in charge and its further
operations terminated.
By Mr. Coote:
_Q. I have just one question. I want to refer to a question asked by Mr.
Irvine regarding the counsel employed by the Bankers’ Association. I would
like to ask the witness whether there are any counsel here representing the
people or the depositors of the banks in Canada?—A. I think so; I think there
are a large number of gentlemen who are looking after the interests of the
people.
Q. A second question. Do you think, Mr. Ross, they are as well paid?
Hon. Memsers: Oh! oh.
Witness retired.
The Committee adjourned.
CoMMITTEE Room 429,
Hovusr or CoMMOoNS,
TuHourspay, June 12, 1924.
The Select Standing Committee on Banking and Commerce met at 10 o’clock
a.m., Mr. McMaster presiding.
G. D. Frnuayson recalled.
Witness: Mr. Chairman, when I was here before I was asked to get some
information regarding the loss of deposits through the failure of banks over the
last 20 years. The question, I think, was asked by Mr. Healy. I have obtained
through the Department of Finance a memorandum showing the losses to
depositions through the failure of banks during the last 20 years, and I may just
read it.
(Mr. Henry T. Ross.]
BANKING AND COMMERCE 339
APPENDIX No. 1
EXHIBIT No. 17
Nine banks have suspended in the last 20 years. The Bank of Yarmouth
(1905) ; The Ontario Bank (1906); The Sovereign Bank of Canada (1908); and
as poe de St. Hyacinthe (1908, voluntarily) and the St. Stephens Bank
1910).
Mr. Morin: And the Bank de St. Jean.
Witness: I am coming to that. These five banks paid one hundred cents
on the dollar. In the case of the other four banks, losses have arisen as
follows:
Banque de St. Jean (1908)—
Paid 30-2 per cent to unsecured creditors leaving a
MEMCIUROUEES ot Moar te eer gee Verne Seales $200,461
Farmers’ Bank (1910)—
Liquidation incomplete. No payment has been made to
depositors and very little resources for such purpose.
WeMOsInS, MTOMMpC! TOs. ce sie Ms het cogs ta tee $1,134,036
Bank of Vancouver (1914)—
Liquidation incomplete. Liquidator estimates there will
be payment about 6 cents on the dollar to ordinary
depositors. Excluding Provincial Government de-
posit of $102,834 (preferred claim), and taking
public deposits as a total loss the amount is.. .. $246,755
By Mr. McQuarrie:
Q. Is that the total amount of dividend, six per cent?—A. It is estimated
that there may be a further dividend, the only dividend.
The Actina CHarRMAN: The first and final.
Home Bank of Canada (1923)—
Excluding Dominion and Provincial Government
deposits, and on the basis of a payment to
ordinary depositors of 35 per cent, the loss would
ieee dae ble Jigen Lesa ome es eee 2 Oe. we SRT Oa
By Mr. W. F. Maclean:
Q. About these preferred federal and provincial depositors, are they
secured?—A. They are preferred.
Q. Against the ordinary depositor?—A. So I understand, sir. I was also
asked to get the average of the total deposits for the last 20 years. These
figures could be most conveniently obtained, I think, from the Canada Year
Book, page 818, 1922-23. Taking these figures a ready calculation may be
made of the average of the total on deposit in Canadian chartered banks from
the years 1903 to 1922 inclusive, which amounted to $1,228,880,418.
By the Acting Chairman:
Q. That is the average of deposits for any one year?—A. The average
deposits for any one year. I think the object of this question was to find out
what assessment would have to be made on the total annual deposits to provide
for the losses that may be incurred.
Q. On an actuarial basis?—A. It is not really an acturial problem; it is
really an arithmetical problem because there is no law that we can go on. This
is the way it was worked out. The total loss to depositors through failure
of chartered banks in Canada during the last twenty years has been $11,351,192,
and you get the average loss per year by simply dividing that amount by 20,
which would give you $567,560. The average total deposits over the last twenty
(Mr. G. D. Finlayson.]
340 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
years is $1,228,880,418. The percentage loss of average annual deposits for the
last 20 years is one-twentieth of one per cent, or -05 per cent. Of course, we
must realize this—and this is really the vital question—we may assume, if
we like, that for the next 20 years the loss of deposits is going to be the same
as it was during the last 20 years; but who is going to say when that loss is
going to occur? Is the loss going to occur in equal amounts each year; 1s the
total loss going to occur at the end of five years; at the end of ten years, at
the end of fifteen years or at the end of twenty years?
By Mr. Coote:
Q. Or next year?—A. Or next year. According to the answer to that
question the cost must be varied. One-twentieth of one per cent would apply
on the assumption that the losses were going to be sustained in equal amounts
in, each year. If, however, we assume that the total loss of $11,000,000 is going
to be sustained at the end of five years, then the annual assessment would
have to be $2,012,949, or one-sixth of one per cent, instead of one-twentieth
of one per cent, assuming equal distribution of losses. If we assume that the
losses are going to be sustained at the end of ten years, the assessment would
have to be $907,145, or one-fourteenth of one per cent. If we assume that the
losses are going to be incurred at the end of fifteen years, the assessment would
be one-twenty-fifth of one per cent.
By Mr Irvine:
Q. Would that include the interest?—-A. That is taking into account the
interest. If we assume that the losses are going to occur at the end of twenty
years, the annual assessment in the meantime on the annual average deposits
would be one-thirty-third of one per cent. These assumptions are purely arbit-
rary in the absence of any proper statistical basis.
By the Acting Chairman:
Q. You are an insurance expert, an actuary. Suppose you had an actual
loss to provide for, and you were not sure when it was going to happen, could
you calculate on an actuarial basis what would be a fair insurance premium
to charge?—A. No, it is not an acturial problem at all, gentlemen, because there
is no law to work on. Acturial work is based on the assumption that there is
some law. There is no law governing the failure of banks.
Q. Some law of average?—-A. The law of average. Here you have over the
last twenty years four banks that have failed. Supposing that we assume that
there was going to be an equal distribution of lossess during the next 20 years
and you start making your assessment of say $567,000 a year, or something
of that sort, and you have a great big failure involving millions in the first
year or two; where is your fund? Your fund would be negligible compared with
the total amount of loss. :
By Mr. W. F. Maclean:
Q. You could set apart a fund in the various banks and make them more
or less responsible?—A. To be sure you would have to set aside right at once
a fund to meet the total amount of losses that you are going to assume will be
incurred in the next 20 years.
Q. And ear-mark that fund?—A. That is the only way in which you could
be safe, and even then, you might be short of the money because there is no
saying what the failures during the next 20 years will be.
By Mr. Coote:
Q. Say, one-quarter of one per cent might be taken on eighty per cent of
those deposits, assuming that the deposits under $3,000 would be in the neighbor-
[Mr. G. D. Finlayson.]
BANKING AND COMMERCE 341
APPENDIX No. 1
hood of seventy-five or eighty per cent; and that could be set aside in the hands
of the inspector who is to be appointed under this Act, and if they were used
to cover losses they would cover them simply to the extent that the fund would
cover them. A bank might fail next year, or we might not have another failure
for say ten years; and the losses of depositors in this failed bank would be
paid so much a year, so many cents on the dollar of his deposit through this
guarantee fund?—A. That would be in the nature of a post-mortem assessment.
The assessment would be made after the losses occured, rather than before.
Q. It would be made each year. It would not be an absolute guarantee
to the depositors, but whatever came into this fund would be used to cover the
losses that occurred?—A. The only conclusion really I can come to is that it
is not an insurance scheme, this bank deposit scheme, and I do not see how it
could be worked out with any degree of satisfaction.
By Mr. Morin:
Q. What are the average earnings of the banks in proportion to this deposit?
—A. I would not like to say. I may say that I have not scrutinized the bank
returns. Probably some official of the Department of Finance would be able
to give you that information.
Mr. Morin: The tax must be based on the earnings of the bank.
By Mr. McQuarrie:
Q. You are dealing with savings deposits or is it with the total deposits of
the banks?—A. I have been dealing with the total deposits over 20 years.
By the Acting Chairman:
Q. Mr. Williams when he was before us stated that on the experience of the
last twenty or thirty years—I forget which—$25 would insure one million
dollars. Does that work out with your figures?—A. I cannot find any basis in
the figures we have here for such a statement as that. It may apply in the
United States banks—I do not know, but it certainly does not apply here.
Q. You calculated down to a percentage. Would that percentage be any-
thing in the neighborhood of $25 on one million dollars——A. One-twentieth of
one per cent is my computation. One-tenth of one per cent on one million dollars
would be $1,000 and one-twentieth of one per cent would be $500 which is twenty
times the amount stated by Mr. Williams.
Mr. SuHaw: Mr. Williams’ figures were based on the last seven years and
during the time when the United States Government had a thorough inspection
system in operation.
Witness: The other point on which I was asked to give information was
the system of guaranteeing bank deposits in the United States. I have here a
memorandum which I think I may read to the Committee to save time. (Reads).
EXHIBIT No. 18
Memorandum
Re
Guarantee of Bank Deposits
“The guaranteeing of bank deposits is practically unknown in Canada.
“Tt is frequently stated that this practice is common in the United
States and the impression is given that it applies to the deposits of
individual and private depositors. It should therefore be clearly pointed
out that—
[Mr. G. D. Finlayson.]
342 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
“1. In the United States the guaranteeing of private depositors
accounts is practically unknown. j
“9. The only accounts which are guaranteed are those of public
bodies which are required by law or by-laws of the bodies themselves
to have such deposits insured. These deposits are funds of the State
Governments, Municipalities, School Boards, some Fraternal Orders and
other similar bodies.
“The first enquiry made by a guarantee company asked to guar-
antee a certain account is whether the law requires the account to be
guaranteed. If it does, the proposition is considered, if not, it is rejected.
“The rate of premium is one-half of one per cent of the average
balance or $5 per $1,000 and is uniform for all banks, clients and dis-
tricts.
“The application for the bond is always made by the bank.
“The volume of this business in the United States is quite large
and has for a period of years been fairly profitable. In recent years,
however, the experience has been unfavourable, particularly in the
agricultural districts. The business is carried mainly by the ordinary
guarantee insurance companies.
“Lloyds has little if any of this business in the United States. The
guaranteeing of bank deposits in Great Britain is practically unknown.”
That seems to represent the experience of the insurance companies guar-
anteeing deposits in the United States.
The Actinc Cuarrman: Now, gentlemen, shall we proceed to the examin-
ation of witnesses? Are there any further questions to be asked of Mr. Finlayson
before we proceed with other witnesses?
By Mr. Ward:
Q. I think you said, Mr. Finlayson ,that some nine banks have failed in
the last 20 years, or thereabouts?—A. 13; about nine have paid in full, and four
have incurred losses.
Q. Of the four whose depositors were not reimbursed in full, I think you
said that the loss had been somewhere in the neighbourhood of $11,000,000?
—A. $11,000,000, yes.
Q. Is it fair for us to assume, then, that these other banks that were
absorbed by stronger banks, that the losses would compare favourably with the
losses of the banks that were not taken over? Have I made that clear?
‘The Actine CuatrmaNn: Not to me.
The Wirness: I do not quite get the point.
By Mr. Ward:
Q. What I wish to ask is this, that if the four banks which went into
liquidation had a loss, the depositors sustained a loss of $11,000,000, is it fair for
us to assume that that would be a fair comparison of loss of the other banks,
though they were absorbed by stronger banks had they been allowed to fail?
I think this is a very important question, and one that seems to have somewhat
slipped the attention of the examination before this committee. If these
other nine banks had losses similar to the four which went into liquidation, I
should say it is a serious matter.
The ActTING CuairMan: Mr, Ward, I am just going to rule at the beginning
that we are not going to have any questions which are really arguments;
we will just ask the witness questions and get his ideas.
[Mr. G. D. Finlayson.]
BANKING AND COMMERCE 343
APPENDIX No. 1
The Witness: I would not be able to answer the question; I have no
means of knowing what the loss would have been.
The Acting Cuarrman: Any further questions of Mr. Finlayson, gentle-
men? If not, we thank you very much, sir. Now, the next witness is Mr.
Saunders.
J. C. Saunpers, Deputy Minister of Finance called and examined.
The Acting CHarrMan: Is it the desire of the committee to examine Mr.
Saunders about the Finance Act? If so, Mr. Saunders tells me he has prepared
a comprehensive memorandum with which he would like to introduce his
evidence before the committee. If it is the desire of the committee I shall ask
Mr. Saunders to read this memorandum to us. Viva voice examination is a
great deal more interesting, but I think perhaps if the memorandum is not too
long, we might start with it.
The Witngess: (Reads)
Advances to Banks Under Finance Act 1923
Under authority of section 2 of the 1923 supplement to the Finance
Act of 1914, the Minister of Finance may make advances by the issue
of Dominion notes upon the pledge of the following securities—(repay-
ments under authority of section 7 to be made in Dominion notes to the
Minister or to an Assistant Receiver General) :
(a) treasury bills, bonds, debentures or stocks of the Dominion of
Canada, United Kingdom, any province of Canada, and of any British
possession ;
(b) public securities of the Government of the United States;
(c) Canadian municipal securities;
(d) Promissory notes and bills of exchange secured by documentary
title to wheat, oats, rye, barley, corn, buckwheat, flax or other commodity ;
(e) promissory notes and bills of exchange issued or drawn for agri-
cultural, industrial, or commercial purposes ‘and which have been used
or are to be used for such purposes.
Section 6 provides that advances shall be for a period not exceeding
one year and interest thereon shall be payable at such rate as may from
time to time be fixed by the Treasury Board.
The rate of interest as at present fixed by the Treasury Board is five
per cent per annum.
Section 3 of the Act provides that such securities shall be deposited
with the Minister or with an Assistant Receiver General, and, further, that
the Minister may request the trustees of the Central Gold Reserves =
make a valuation of and recommendation as to the amount which,
their judgment, may properly be advanced on any securities submitted.
Section 4 provides that the Minister may permit bills of lading or
other documents of title, covering grain or other commodity while in transit
to go forward under the control of the bank to the point at which delivery
is made and payment therefor is received, the bank to be a trustee for
the Minister, to the extent of the advances, of the proceeds received for
such grain or commodity.
Section 5 provides that all promissory notes or bills of exchange when
pledges shall have a maturity exclusive of days of grace, not later than
six months from the time at which they are pledged.
Section 9 provides that these advances shall be deemed to be an
amount due by the bank to the Government and shall be a second charge
upon the assets of the bank.
[Mr. J. C. Saunders.]
344
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Section 10 provides that the bank shall satisfy the trustees of the
Central Gold Reserves before an advance is made that any promissory
notes or bills of exchange issued for agricultural, industrial or commercial
purposes, offered in pledge, have in fact been issued or drawn or the
proceeds have been used or are to be used in the first instance, in pro-
ducing, purchasing, carrying or marketing grain or goods, wares and
merchandise within the meaning of these words in the Bank Act.
Section 11 provides that no advances shall be made against the pledge .
of promissory notes or bills of exchange issued for the purpose of carrying
or trading in stocks, bonds, or other securities, or to be employed on
capital expenditures of any kind, and the Minister may direct the trustees
to make inquiry and report as to whether any notes or bills offered in
pledge fall within the prohibition of this section.
Advances under the Finance Act are authorized by the Treasury
Board on the formal application of the bank, enumerating the securities to
be tendered as collateral, such application being in the form prescribed by
the Treasury Board. (See EXHIBIT No. 19 at page exxxii.)
The ActING CHAIRMAN: Who are the members of the Treasury Board?
The Witness: The Minister of Finance is the Chairman; the Minister of
Railways and Canals, the Minister of Customs, the Minister of the Interior,
and the Postmaster General.
By Mr. Shaw:
Q. The Act provides that it shall be the Minister of Finance and five mem-
bers of His Majesty’s Privy Council, with the Deputy Minister of Finance
as the Secretary, ex officio?—A. Yes.
As all advances under the Finance Act become due on May 1st of
each year, it has grown to be the practice for the banks to submit to
the Treasury Board, just prior to that date, their applications for the
authorization of advances to cover anticipated or possible requirements
during the whole of the ensuing year, including the renewal of outstand-
ing amounts. This practice, of course, does not in any way preclude the
bank from making other applications in the course of the year which
changing conditions may require.
Within the scope of the approval or authorization given by the
Treasury Board, and upon deposit and pledge of the approved securi-
ties, the Department makes loans from time to time upon the written
or telegraphic request of the bank. Advances may be made at Ottawa,
or at the office of any Assistant Receiver General, at the bank’s option,
and repayments are due at the offices at which the advances were made.
In practice, most of the advances are made either at Montreal, Toronto
or Winnipeg. Where securities are kept on deposit with the Depart-
ment (as many banks do, whether there are outstanding advances or
not), advances are obtainable upon notice of an hour or two, although, if
possible, the banks are asked to give twelve hours’ notice of their
requirements.
The form of pledge agreement to be deposited with the collateral
is prescribed by the Treasury Board (see Exhibit 20. printed at end of
this evidence). On the form are printed regulations, terms and condi-
tions applicable to all advances under the Finance Act, covering such
matters as rate and payment of interest, repayments, release of securi-
ties and procedure on default.
Under the provisions of section 12 of the Act a Treasury Board
Minute of May 30th, 1923, authorized the margins by which the different
[tMr. J. C. Saunders.]
BANKING AND COMMERCE 345
APPENDIX No. 1
classes of securities deposited should exceed in value the amount of the
loans. The schedule is as follows:
Against Dominion of Canada Treasury Bills and Bonds—
advances to be made dollar for dollar of the par value;
Against bonds guaranteed as to principal and interest by the
Government of the Dominion of Canada—a margin of 10 per cent
on the market value;
Against British Government Treasury Bills and Bonds—
a margin of 10 per cent on the market value;
Against short-term securities, not exceeding one year, of the
Governments of the Provinces of Canada—a margin of 10 per cent
on the market value;
Against other securities of the Provinces of Canada and securi-
ties carrying the guarantee, as to principal and interest, of the
provinces of Canada—margin of 15 per cent on the market value;
Against bonds of Canadian municipalities—a margin of 20 per
cent on the market value;
Against assignments secured by documents—covering grain,
flour, cereals and feed—a margin of 25 per cent;
By the Acting Chairman:
Q. Against their market value?—A. Assignments would have no market
value. 25 per cent of the amount loaned, the amount involved.
By Mr. Shaw:
Q. That is, the amount loaned by the banks?—A. Yes. There would be
no listed market rate on that.
By the Acting Chairman:
Q. Suppose the bank had advanced $1,000 on a bill of lading of 1,000
bushels of wheat?—A. Yes.
Q. And at the time of the advance by the bank wheat was worth say
$1.10 a bushel. Then, under your Act, you would advance up to $750 on
that bill of lading?—A. Yes.
Q. That would give you a margin of more than 25 per cent as of the value
of the wheat at the time when the original advance was made by the bank.
If wheat went down, your margin might be cut down too.—A. But, Mr. Chair-
man, the bank takes that risk.
Q. What I wanted to make clear was this; it is 25 per cent below what
the bank has advanced against the security, not against the value of the
security upon which the bank has advanced?—A. Yes.
By Mr. Shaw:
Q. The bank may have advanced altogether too much, in which case the
Finance Department will have a 25 per cent margin to work on. It has no
relationship to the value of the goods at all?—A. No.
Against commercial paper endorsed by the bank to the order of the
Minister of Finance—a margin of 25 to 35 per cent as the Minister may
determine.
In tendering securities, the bank usually submits its own valuations thereof
which are checked by the departmental officials against current market quota-
tions and such other information as is at its disposal, including the valuations
placed upon insurance, trust and loan companies’ investments by the Superin-
tendent of Insurance.
(Mr. J. C. Saunders.]
346
SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
The following is a tabulation showing the peak of the loans under the
Finance Act in each of the years during its operations: —
Month
November, 1914.. ..
January, (On ee ites
February: P9167 Ok: 2
October, 19174725 ¢.22274
November s19lSve% 00 -
November 1019.0 fers 0) Soe
November lO20ie: . 53 aie
January 21920) gos re rt eo, 2,
January, 1922..
October, 1923..
Maximum amount
of advances
in each year
..$ 12,767,500 00
10,720,000 00
2,777,135 00 |
52,170,000 00
116,500,000 00
112,957,000 00
123,689,025 00
108,707,960 75
60,619,769 74
40,020,000 00
At the present date, the total ish Le are $17,000,000, of which
$5,370,000 are against Dominion of Canada Treasury Bills, $3, 000, 000 against
Grain securities, and $8,630,000 against other approved securities including
Dominion, Provincial and Municipal bonds.
The following tabulation shows the total par value of the different classes
of securities at present held by the Department securing loans or available for
that purpose, the amount which may be advanced thereon under Treasury Board
regulations and the amount of advances at present outstanding.
Total
par value
.$ 40,735,000 00
16,612,400 00
Securities
Dom. of Can. Treas. Bills.
Dom. of Can. Bonds..
Prov. Govt. Securities. . 1,840,549 15
Can. Mun, securities:. .+ .- «3,078,974 87
BnitisheGovt. Bonds -4... 4. 120,000 00
Dom. Guaranteed Bonds... 447 333 00
Prov. Guaranteed Bonds... 329,399 00
Grain.. 3,892,000 00
Total amount
that may be ‘Total advances
advanced thereon outstanding
$ 40,735,000 00 $ 5,370,000 00
16,612,400 00
1,572,423 98
2,482,734 13
113,455 00
BSGalt (2
280,140 00
3,113,600 00
8,630,000 00
3,000,000 00
$ 67,055,656 02
$ 65,297,070 83 $ 17,000,000 00
The revenue received by the Government in each year, as interest upon
Finance Act loans, has been as follows:—
Year ended
March 31st
Oia. :
1016) | f
NOLES 3
OU Se
TOLO Gt: ay.
1G2Z0 shh:
TS PAT cts
ODO ee
TOD Ree
1924..
{Mr. J. C. Saunders.]
Amount
sank: Zitoot oy
62,722 49
105,458 12
754,792 O01
2,395,643 02
3,322,952 78
3,568,106 74
2,392,598 57
1,249 677 90
775,170 38
$ 14,838,673 98
BANKING AND COMMERCE 347
APPENDIX No. 1
By Mr. Shaw:
_Q. Any United States bonds in the list?—A. No. Provision is made for
United States bonds, but none has been tendered.
By Mr. Irvine:
Q. Can you tell us the total amount that has been advanced on municipal
bonds?—A. Yes. We hold Canadian municipal securities in our hands of
$3,078,000 and the amount that could be advanced is $2,482,000. At the present
time there is nothing outstanding against them.
By Mr. Maclean:
i ve Does that go into the consolidated revenue, any profits from that?—
. You
By Mr. Spencer:
Q. How long has this been in operation?—A. That is from 1914 up to the
31st of March last.
By Mr. Hodgins:
Q. How do you hold these municipal securities, when there is nothing
advanced on them?—A. They have been submitted to the Board, and they
were allowed to stand in our hands so the banks could realize on them at once,
to save the time of sending them on when they needed money.
The CHARMAN: May I make a suggestion? In questioning Mr. Saunders,
let us proceed in an orderly way, and have each member conclude his examina-
tion before another breaks in.
By Mr. Shaw:
Q. Mr. Saunders, you have been the Deputy Minister of Finance for how
long?—A. Since 1920.
Q. And how long have you been in the Department of Finance?—A. Since
1887
Q. Then I take it that this system has revolutionized itself during your
experience with the Finance Department?—A. Yes, Mr. Shaw. The Finance
Department to-day, compared with what it was even in pre-war days, is entirely
different.
Q. That is, the Finance Act came in in 1914?—A. Yes.
Q. Then you have also partly under your jurisdiction the Mint, which came
in in 1908?—A. Yes.
Q. And various supervisions in connection with financing and all the other
matters that come under your jurisdiction, even within the last ten or fifteen
years have been completely changed?—A. The various changes in banking
legislation, do you mean?
Q. Yes.—A. Yes. The Bank Act was changed, too.
Q. You have told us about the composition of the Treasury Board, and
the arrangements for operation under the Finance Act. I think you have indi-
cated the mechanism fairly thoroughly. Who fixes what members of the
Cabinet, what members of the King’s Privy Council for Canada shall be the
members of the Treasury Board?—A. The Governor-in-Council.
Q. And I suppose, owing to the list you have given, that they are chosen
probably with special reference to their knowledge of financial matters; is that
the theory or the principle?—A. I just take them as they come.
Q. We all sympathize with you. How often do they meet?—A. In normal
times they try to meet once a week, but Parliament rather upsets that.
(Mr. J. C. Saunders.]
1—35
348 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. How many constitutes a quorum?—A. Three.
Q. So you ordinarily have a meeting once a week, with at least three
present?—A. That is what we try to do. There is no special time set.
Q. Do these gentlemen on the Treasury Board change from time to time?
For instance, would it be impossible for Mr. Motherwell, for example, to take
the place of Mr. Stewart, or one of the other members, or are there frequent
changes?—A. No, there are not frequent changes, except supposing a Minister
goes out who happens to be a member of the Board, and he has to be replaced.
Q. For example, Mr. Robb went off to Australia. I suppose during his
absence somebody else would be appointed—A. No, we would have our quorum
of three.
Q. Do I understand correctly that only the banks can take advantage of
this Finance Act?—A. Only the banks,
Q. Suppose, for example, that a province came here with gilt-edged bonds
—and lots of provinces have them—
The CHAIRMAN: Quebec, for instance.
By Mr. Shaw:
Q. The province of Quebec, for example, and they came to you as secretary
of the Board and said, “Here is $1,000,000 worth of bonds; we want $10,000
in notes.” What would you do?—A. I would tell them they must get the Finance
Act amended.
Q. Or shift them off to the banks?—A. Yes, they could do it through a
bank.
Q. So the fact is that this Finance Act is something which operates only
at the instance of the banks?—-A. Yes, at the present time.
Q. Nobody else in Canada, no matter what their security, has any right to
go directly to that Board and ask for accomodation?—A. No.
The CHairRMAN: That is getting near the line of argument.
Mr. SHaw: No, it is a fact. I refuse to even enter the realm of argument
in the matter.
Mr. Marter: I wonder if it is possible to ask the gentleman what ad-
vantage it is for anybody else coming under the Finance Act?
Mr. SHaw: That would be a matter of argument.
The CHatRMAN: You might ask the witness’ opinion on that; I do not think
that would be argument.
Mr. SHaw: That might be a matter of argument, and I will not touch it.
Q. Now, Mr. Saunders, you have stated that the interest rate is five per
cent. Has it ever varied, to your knowledge?—A. In the early part of the war,
the then Minister of Finance, in arranging for the banks to make a large loan
to the Imperial Treasury for war purposes here in Canada, that is for supplies
in Canada, allowed the banks the privilege of rediscounting, you might say,
with the promise that they could have it for three and a half per cent, -but
that was just a temporary thing, because the banks were rather afraid of it.
Q. That was just one special instance?—A. Yes.
Q. So it would be correct to say that during the operation of this Act, with
the single exception you have mentioned, the interest rate has been fixed at five
per cent?—A. Five per cent.
Q. There has been no variation?—A. No variation.
Q. Might I ask you this? Is there any expert or advisor to the Treasury
Board, outside of yourself, at these meetings?—A. I hope not. I am supposed
to be the advisor.
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 349
APPENDIX No. 1
Q. Do you have a special knowledge of the problems, for example, of
inflatation and deflation?—A. I do not consider myself an expert, but I naturally
have a little experience and knowledge of it.
Q. Can you tell me whether or not the interest rate might be used as a
means of assisting in the process of deflation, or as a weapon which might be
used against inflation?—A. I do not quite get that. ;
Q. Do you recognize the interest rate, that is the raising and the lowering
of the interest rate, as an effective instrument not perhaps thorough, but an
effective instrument to cause deflation or to assist inflation?—A. I do not think
so.
Q. You think the interest rate would have no relation to that matter at all?
—A. I do not think so.
Q. And consequently it would be wholly unnecessary to have either an
increase or decrease in the interest rate for that purpose under the provisions
of the War Finance Act?—A. We have never looked at it in that way, nor
considered it in that way.
Q. Then it would be fair to say that as an instrument for the purpose I
have mentioned, the Treasury Board does not consider it, and has never con-
sidered it?—A. Not in that light, no. It has always been considered as meeting
the needs of the banks in their commercial business, and work outside in the
business world.
Q. Is it profitable, Mr. Saunders, for the banks to take advantage of the
provisions of the Finance Act?—A. It must be, or they would not work it.
Q. And do you know the ordinary procedure of the banks in connection with
the operation of the Act? Probably I had better put that this way. Is this
what ordinarily happens, that the banks come to you with their securities,
take advantage of the provisions of this Act, get the Dominion notes at five
per cent, and then take these Dominion notes to the Central Gold Reserves and
thereby get the right to increase their own circulation?—A. Yes, they can,
but as I see it that is not the usual reason for getting it. It would not pay
them; the banks are so anxious to have these repayments made and escape the
five per cent interest that I do not think they would pay five per cent just for
the sake of getting further circulation, unless they could make that work in
business.
Q. Do they not make that work in business?—A. I should think they do.
Q. And they would have little difficulty in getting their circulation out at
a rate exceeding five per cent, would they not?—-A. Well, of course we do not
follow the money out, to see what rate of interest they get.
Q. I was wondering if you knew what it seems to me must be a perfectly
clear practice, for them to go with the Dominion notes secured under the War
Finance Act, and take them right over to the Central Gold Reserves and get
the right to increase their circulation by depositing them there—A. As a
matter of fact the banks use these notes mostly to meet clearings. The
circulation is an intricate business for the banks to keep track of, they have
so many branches flung all over the country, and they have several expert
men watching the circulation. When they think they will be met by demands
at the Clearing House beyond their resources to pay in Dominion notes, they ask
for these advances, they may put them in and when they are not needed they
will take them out again, because they do not want to pay the interest. Or they
may leave it in.
Q. Would you suggest that the main purpose that the banks have in mind
in applying under this Finance Act is for the purpose of getting large legals
in order that they may meet their Clearing House returns?—A. That is my
opinion.
(Mr. J. C. Saunders.]
1—35}
350 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. That would not be a matter that would necessarily come within your
special knowledge?—A. No.
Q. You have spoken about the circulation of the banks. The bank
circulation, as you know, is fixed by the Bank Act which includes and is limited
to amount of the unimpaired capital, and the amount to the credit in the
Central Gold Reserve, subject to certain changes during certain seasons of the
year, certain additional provisions?—A. Yes.
Q. What arrangement do you have to see that the banks keep within the
legal limits of their circulation?—A. Well, Mr. Shaw, if you look into the
Bank Act you will see that we get about fourteen returns from the banks, and
among those returns is the circulation. Then we get a special monthly return:
that return is scrutinized by a special officer in the Department under my own
direction, and the circulation is checked up so as to grasp the situation and see
that there is no over-circulation. Of course, if there is over-circulation there
is a penalty under the Act.
Q. I suppose that that penalty has been imposed on some occasions?—A.
Yes. If you will allow me, I may say I never knew any over-circulation that
showed an attempt to over-circulate. It has been owing to some little clerical
mistake or some unlooked for event. Nevertheless, we go after them.
Q. Have you read the evidence in connection with the Home Bank?—A.
Not too closely.
Q. Are you aware of the fact that the capital of that bank was impaired
to a very large extent as far back as 1916?—-A. There was nothing to show that
that was the case in the returns to the Finance Department.
Q. They make a return to you?—A. Oh yes.
Q. I suppose, Mr. Saunders, indicating the paid-up capital, but you would
know that without their telling you?—A. Yes.
Q. They would indicate in this return, from month to month, the amount
of circulation outstanding?—A. Yes.
Q. And as long as the circulation outstanding was not in excess of the
amount of paid-up capital, you would be satisfied?—A. Surely.
Q. The Bank Act says that it must not exceed the unimpaired capital?—
A. Well, the unimpaired capital is what the bank returns show as so and so.
Q. Do they make a return as to their unimpaired capital, or as to their
paid-up capital?—A. No, its paid-up capital. If we looked at it in that light,
we would have to go into every bank every month and see whether they were
solvent or not.
Q. Do you recognize any difference between paid-up capital and unim-
paired capital?—A. No,—well, hold on,—paid-up capital is the amount that
has been paid into the bank. If the bank has impaired its capital by any
loans, the paid-up capital is all they show us, and I would not know whether
they had impaired it or not unless they said so.
Q. But the fact is, so far as the Department is concerned, that they have
no means of knowing whether the capital of a bank is at any time impaired?—
A. We have through the returns. For instance, we examine the assets and
liabilities, and if the returns show that the bank is in a sound position, its
capital cannot be impaired. ‘
Q. Has any bank ever forwarded a statement to the Department of Fin-
ance indicating that it is in an unsound financial condition during your experi-
ence in the Department?—-A. No, I do not think there has been.
Q. You would not expect them to, would you?—A. I would think they
were honest.
The Acting CuairMAN: He would think they were honest.
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 351
APPENDIX No. 1
By Mr. Shaw:
Q. Did the Home Bank officials, for instance, ever forward to you a state-
ment showing that as far back as 1916 their capital was impaired?—A. Indeed
they did not. There are lots of things they did not do.
Q. What about the Merchants Bank?—A. The Merchants Bank?
Q. Their statements were not honest either, were they?—A. Well, to a
certain extent, they did not show the true position of the bank, but that was.
their lookout. If they made wrong certificates and wrong declarations, we could
not get behind that under the old Bank Act.
Q. I am not casting any reflection; I appreciate that under your existing
machinery you had to take the returns that the banks may send in, and. if
these banks wilfully or accidentally make false statements, you have no means
of checking them up, necessarily?—A. No, but I may say that this proposal of
the Minister to have an inspector will round that part off.
By Mr. W. F. Maclean:
Q. Who will—
The Acting CHAIRMAN: Do not be interrupted.
Witness: Because one of his first duties would be to verify the figures
sent to the Department in the returns.
By Mr. Shaw:
Q. Quite right, I agree with you. AlI 1 want to get from you is this: I
am not trying to blame anybody—I say that so far as the condition of the
banks at the present time is concerned, the Department of Finance, the
Minister of Finance, the Deputy-Minister of Finance, and all the officials
of the Department must rely upon the returns which the banks send in?—A.
That is what Parliament tells us to do in the Act. I may say, Mr. Shaw,
that our financial men are such an outstanding class that we would not suspect
them of making any mis-statements. When mis-statements have been made, it
has only been in certain cases due to knavery or crookedness, and you cannot
judge the other banks by that.
Q. I am not trying to, but my memory runs back fifteen or twenty years
and I can recall that in the Farmers’ Bank, the Ontario Bank, the Merchants
Bank and the Home Bank false returns were made to the Department of
Finance, if my memory is correct?—A. How many banks did you say?
Mr. Marter: I do not think that that is a statement which should go on
the record.
The AcTtING CHAIRMAN: They were not all thought guilty.
Mr. SuHaw: The false returns were admitted, but the question was did
they wilfully make those false returns?
The Acting CHatRMAN: To say that a bank makes a false return
connotes, I think, that it is wilfully false.
Mr. SHAw: No, false may mean untrue; it may be wilfully or not
wilfully made.
Wirness: False returns? The return made in the case of the Merchants
Bank, for instance, their trouble was that they did not recognize the deprecia-
tion in some of their big loans, and they hoped eventually to get them, so they
kept them on the return showing their face value.
Q. Please do not misunderstand me. I am only talking of false state-
ments innocently made to the Department. That is the lowest class of case
we can imagine?—A. I would not say designedly false.
(Mr. J. C. Saunders.]
352 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. I say in regard to those statements that the Department have no
means of checking up statements which are false without any intentional
desire to make them false?—A. No, if they put in their loans, their current
loans at a certain value, we would not know the difference.
Q. Would it then be correct to say that so far as those returns of banks
to the Finance Department, as it exists to-day, are concerned, the Finance
Department stands in the position of an adding machine?—A. I would not
admit that at all. All returns that are given to the Finance Department
to-day—the Finance Department can grip anything unless there is roguery
or knavery designedly on the part of a bank to mislead the Department by
making false returns.
Q. You think then that there is a complete system of checking up these
returns and of ascertaining their falsity unless there is some exceptional
idea of roguery or knavery involved? Is that it?—A. Yes.
Q. Tell me what you do to check up the returns sent by a bank monthly,
for example?—A. I have here a memorandum of the returns sent to us
showing just what we do. It is a little lengthy—
Q. Could you leave that with us?—A. It is not in a form perhaps to be
intelligible.
The Actinc CuarrmMan: If it is not in a form to convey an intelligent
idea, you had better read it or make some reference to it.
Mr. Suaw: I suggest that he put it in the form of a statement like the
first statement he made, and it will go on the minutes.
Wirness: I could interpret it, but perhaps it is not in a readable form.
By Mr. Shaw:
Q. Before you go on to that in detail, I want to ask you one or two
other questions, and then I shall be through. With regard to this question
of circulation, having in mind that the circulation of a bank depends on
the unimpaired capital, there is no doubt from what you say that the
Department have no means of checking up the question as to whether there
has been- an impairment of its capital or not?—A. No, we have no bank
inspection.
Q. And as a result, a bank even with its capital impaired, may go on
issuing worthless or illegal notes to the public?—A. They are not worthless,
they are as good as any note of any other bank.
But so far as being legal is concerned—A. That does not lessen their
commercial value.
Q. Put it this way—I want to make this point clear—can a bank illegally
issue its notes by reason of impairment of its capital, and the Finance Depart-
ment not be any the wiser?—A. A bank cannot do that without several of
their high officials being in collusion. If that were done, it would be a
deliberate piece of knavery on the part of the bank officials.
Q. Would you know about it?—A. No, I would not know about it.
Q. The Finance Department would not know? Now, I want to ask you
about the Mint. The Mint is under your jurisdiction to some extent, is it not?
A. No, the Mint belongs to the Imperial Government.
Q. But there is an arrangement?—A. Yes, we pay the running expenses.
Q. You advance I think $200,000 a year?—A. Yes.
Q. And all the profits made go to the Canadian Government?—A. Yes.
Q. I understand that one of the chief sources of profits arises from the col-
lection of American coinage, silver and copper coinage, and replacing it with
Canadian coinage, is that right?—A. We do not collect American coinage and
replace it with Canadian.
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 353
APPENDIX No. 1
Q. Tell me whether it is not a fact that some years ago an arrangement
was made with the banks by which they collected this American coinage and
we paid a commission; the American coinage was shipped across the boundary,
where it belonged, and it was replaced by Canadian coinage minted at this
Royal Mint?—A. That was so, but it was not necessarily replaced by the Mint.
The banks shipping, if they depleted their silver holdings, they would have to
get Canadian silver in the usual way.
Q. And they would not have to pay for it?—A. Certainly they would
have to pay for it.
@. In purchasing, it the Mint was enabled to make quite a bit of money ?—
A. In purchasing what?
Q. In purchasing the necessary silver coinage to replace?—A. I see your
point. We make a certain amount on our silver coins—
Q. I understand about 100 per cent?—A. Not now, about 50 per cent.
Q. That is quite a lot?—A. Silver was up, you know; it depends on the
price of silver.
Q. There is a big profit to be made in that exchange of Canadian coinage
for the American coinage, is there not? Or have you investigated the matter
particularly ?—A. I do not see where the American coinage comes in at all. Our
silver circulation goes out as the banks require it for commercial purposes.
When they get American silver in and ship it out, that is their business. I
may say that the banks are filled up with silver now and have more than they
really require.
Q. Has this arrangement with the banks for the deportation of American
coinage been eliminated?—A. Yes.
Q. So that the banks have no interest now, from a commercial point of view,
in deporting the American coinage?—A. When the exchange is against us, it
helps them a bit if there is enough difference to pay for the shipping.
Q. But it has to be against us very strongly before they would be interested
in shipping out American coinage?—A. I do not suppose it would cost more
than, say, one-quarter of one per cent anyway to send silver across the border.
Q. What I want to draw to your attention is that in past years there has
been a tremendous profit made by this which accrued to the Canadian Govern-
ment. Now, there is not any. What I want to suggest to you is that it is be-
cause this arrangement with the banks has been eliminated and there is a lot.
of American coinage in the country which should be deported?—A. No, pardon
me, that is not the reason. The reason is that during the war we had to get
a sufficient circulation so that the country would have it for its present needs.
It is not the case that American money is here displacing Canadian money.
During the war period, the Mint worked night and day sometimes turning out
silver for war financial purposes and we were flooded with Canadian coinage.
Q. Do you think that there is no American coinage in circulation?—A.
There is, but nothing to— -
By the Acting Chairman:
Q. Nothing to write home about?—A. Nothing to write home about.
Mr. Suaw: I know there is a lot in Ottawa.
The Acting CHAIRMAN: Under the Gresham law all the poorer money
driven out by the better American dollar bills and American silver will dis-
aopear.
Mr. SuHaw: I think you will find that the Gresham law will have to be
jacked up a bit before it affects American coinage.
(Mr. J. C. Saunders.]
354 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Shaw:
Q. Then, during the period when our exchange was at its lowest as compared
with the American, there was little of this money shipped over, because it was
too much bother; but the Department of Finance paid the banks a very small
commission in the aggregate—it did not amount to much—but the banks under-
took to gather it and ship it across. I am told that there is from $3,000,000 to
$5,000,000 of American coinage in the country now. I do not know whether
that is true or not?—A. I do not believe it. It is dangerous to go on what we
are told. I do not believe there is any such thing.
The Acting Cuamman: During the war, I noticed, when the exchange
went heavily against us, we did not seem to have nearly as much American
silver or as many dollar bills as we had been accustomed to before. That is my
experience.
By Mr. Shaw:
Q. I do not care whether American currency is at a premium or not; the fact
is, as Mr. Saunders says, that we make 50 per cent on our own money—A. We
cannot make that to-day.
Mr. Suaw: I am not sure of that. ,
By the Acting Chairman:
Q. The total value of silver is even to-day considerably higher than
its intrinsic value, is it not?—A. Yes.
By Mr. W. F. Maclean:
Q. Would you tell us if there has been any loss up to date in connection with
the rediscounting by the Finance Department’?—A. Not one cent.
Q. You mentioned the Central Gold Reserve in connection with rediscount-
ing; have you ever seen that organization?—-A. The Central Gold Reserve?
Q. Yes.—A.By law we have to inspect it.
Q. It is in existence?—A. Yes, it was inspected about three weeks ago.
The Minister appoints a trustee, there are four trustees, and the Canadian
Bankers’ Association appoint three. The Minister’s trustee is the Royal Trust
Company of Montreal.
Q. Have they a treasury in the Royal Trust?—A. They have a vault. It
is held in joint custody with our own trustee representing the Minister. The
three other trustees are appointed by the Bankers’ Association.
@. You mentioned that there was some office discharged by the Central
Gold Reserve in connection with rediscounting?—A. Yes.
Q. And the main persons who get the. rediscounting are the banks?—A.
Well, no—
Q. Mainly? Let me put it this way: The only customers for rediscounting
are the banks?—A. Yes.
Q. Yet this Central Gold Reserve, which is composed three-fourths of the
banks, do the same duty for the country in connection with rediscounting?—A.
Their value to us is this: Supposing we had securities, some small municipalities,
unlisted securities, or promissory notes, or something like that, we as a depart-
ment would have no knowledge of the value of this unlisted stock. It is the
business of the banks to value credits, and if we get from them a certificate that
we can advance so much—
Q. They pass on their own advances to you, as a matter of fact?—A. Yes.
The Actine CuarrMan: I do not think the witness understood that question
or he would not have answered yes.
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 355
APPENDIX No. 1
By Mr. W. F. Maclean:
Q. I asked the witness if this Central Gold Reserve was an adviser of the
Government in rediscounting?—A. They may be.
; They are asked to report on certain securities?—A. Yes, if they are
asked.
Q. And they themselves present these securities?—A. No.
Q. Nobody else can present a proposition for a loan but a bank?—A. There
are fourteen banks, and they do not represent the whole fourteen.
Q. They pass upon loans that are passed on by the banks themselves?—
A. We have been perfectly capable of passing on our own loans, and we have
not asked them to do it. But if we get any obligations involving paper that
we have no means of valuing, then we will ask those financial men their opinion.
Q. Well, the Central Gold Reserve is largely a treasury for securities?—A.
The Central Gold Reserve has nothing to do with securities. Theirs consist of
gold or Dominion legals.
Q. In all cases, Dominion notes, as a matter of fact?—A. No, not at all.
Q. In what proportion roughly?
By Mr. Coote:
Q. Is it not about 25 per cent of gold?—A. Something like that. Yes, in the
Central Gold Reserve $9,502,533, is held in gold coins and the balance is in
Dominion notes.
By Mr. Spencer:
Q. What is the balance?—A. The total deposits are $65,602,000.
By Mr. Benoit:
Q. Where is it located?—A. In the Royal Trust Company, Montreal, in
their vaults.
By Mr. W. F. Maclean:
Q. In the United States the Government itself has control of reserve funds
of this kind, and also the Comptroller of the Treasury. They act for the
State and the banks have to do business with them. What we are trying to get
at here is something like the American system. In the United States, instead
of a central gold reserve controlled by the banks, there is a National Reserve
System?—A. You mean the Federal Reserve Banks?
Q. And it is connected with the Comptroller of Currency?—A. You are
referring now to the Federal Reserve Bank System of the United States?
Q. In the United States a Federal officer performs the duty that is apparently
done here by a Trust Company, in connection with the Central Gold Reserve
which is controlled by the banks largely.
The ActiInc CHAIRMAN: What is the question you are asking the witness?
Mr. W. F. Mactzan: As to the American system of Finance—
Witness: I do not know that I have looked it into it very closely. I do
not see anything the matter with our system.
Mr. W. F. Macuran: I am satisfied with that, if he says he does not know
a better system.
By Mr. W. F. Maclean:
Q. In England, who does this work?—A. I do not know.
By Mr. Coote:
Q. I would like to ask if there is any limit to the amount of Dominion
notes which his department may issue under the Finance Act?—A. No limit at
all so long as the securities are there.
[Mr. J. C. Saunders.]
356 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Is there any limit to the amount you may print?—A. Well, no, but I
would not print any more than would meet our probable requirements on
account of the cost of printing. .
Q. Who prints these notes?—A. The Canadian Bank Note Company.
Q. Have you considered the advisability of printing these notes as far as
possible in the Mint?—A. In 1912 I went to Washington and went through the
printing plant there, and I was rather in favour of doing our own work. I made
a report to that effect. But you see the difficulty of getting a man who is
capable of taking charge of a public engraving department here. You would
have to get skilled men, and we are a young country. My report was never
acted on.
Q. The company that prints these notes now must have capable men, I
suppose?—-A. Yes, but I do not know how many years old they are. They are
one of the oldest companies in the business and they are well organized.
Q. Do you know where the chartered banks get their notes printed?—A.
Mostly by the Canadian Bank Note Company and the British American.
Q. Is there any limit to the amount which they may print?—A. No, but
they must report it to the Canadian Bankers’ Association. You see, Mr. Coote,
in our own case we must have what we call a reserve. We try to keep ample
reserves and so do the banks. These notes printed and are held in the reserve
would mean nothing more than paper. They are put there to meet requirements.
Q. Yes, I am quite well aware of that, but I want to know whether the
Department has any knowledge of the amount thus printed by the banks?
—A. No. They do not make a return to us.
Q. Do you not think you should have some knowledge?—A. No, because
the Canadian Bankers’ Association has the knowledge, and knows how many
notes are printed and in the hands of each bank, and they check it up, as
Mr. Ross told you here yesterday.
Q. On what ground would you justify the turning over of this authority
to the Canadian Bankers’ Association?—A. On the ground of the Canadian
Parliament having done so; because they told us to.
Q. Was not Parliament advised—
The CuHarrMan: Mr. Saunders, speak a little louder, if you do not mind.
Be sure you understand the question thoroughly, and then speak up. Let us
have the question again, Mr. Coote, if you please.
By Mr. Coote:
Q. I asked Mr. Saunders on what ground he would justify the turning
over of this responsibility to the Canadian Bankers’ Association, the respon-
sibility for knowing the amount of notes printed—A. Parliament direct us to
do that.
Q. Was not Parliament offered the advice of the Department of Finance
when this Act was being drafted?—A. That is away back in the former Act;
I think I was scribbling entries in a book at that time; I had no knowledge
of it.
Q. Might we have the benefit of your advice now, when we are considering
changes to this Act, as to whether it would not be better for the Department to
attend to this business itself, rather than delegate his duty to the Canadian
Bankers’ Association?—A. I do not think I could recommend that, because I
do not see any need for the casting of any reflection on the Canadian Bankers’
Association.
Q. I hope you do not suggest that I have cast any reflections?—A. Mr.
Coote, all those questions can be interpreted—I do not think you mean to—
but these are challenging the present banking system.
(Mr. J. C. Saunders.]
BANKING AND COMMERCE 357
APPENDIX No. 1
Q. I am asking you whether you can give me some reason as to why this
duty should not be carried on by your department, instead of the Canadian
Bankers’ Association, the supervising of the printing and issuing of notes which
go from hand to hand in Canada, among the public?—A. I do not think it is
necessary. That is my opinion, and I understand that you are only asking
me my opinion. I think it is unnecessary.
Q. You think it would not be any better if it were under your own depart-
ment?—A. I do not think so.
Q. Do you think that the returns which the banks publish monthly should
be sent to the Bankers’ Association or to you?—A. I think they should be sent
to us, as they are.
Q. Would it not be just as logical to have these returns—A. You mean the
returns under the Bank Act, that are now sent to us? Should they go to the
Bankers’ Association? Do you mean that?
Q. I mean the monthly returns required under the Bank Act.—A. They
should go to us, most certainly.
Q. If these returns should come to you, why should not the circulation
returns come to you as well?—A. We do get the circulation returns. The
circulation returns of the bank, and their reserve notes are two different things.
Q. Why should not the returns of the printing of the bank notes come
to you?—A. Because there is no business in that; they are not worth, in my
opinion, the paper they are written on. Until they get into circulation they
do not go into the business of the country.
Q. When these notes are once printed, is there not a great possibility of
them getting into circulation?—A. Not improperly, I do not think there is
any possibility at all.
Q. You think there is no possibility?—A. No, I do not think you can
find any case where they have. I have no knowledge of it.
Q. Have you known of any cases where a bank has exceeded its powers
of note issue?—A. Inadvertently, sometimes, and we have checked them up
and called their attention to the penalty involved.
Q. Could you tell the committee how you can ascertain whether it is done
inadvertently or whether it is done intentionally?—A. The amount is so
small. I recognize that the banks have great difficulty in controlling their
circulation so they will not violate the Bank Act. They have to make their
forecasts, take all their branches into consideration. If a man makes a little
slip and does not estimate enough, he may go a few thousand dollars over
his circulation, but if it were done designedly, if a bank should start in to
do that designedly, they would deal in bigger figures than that, and the
over-circulation does not amount to very much. It is all due to errors.
Q. Is it not a fact, Mr. Saunders, that in adding up the circulation
returns from several hundred branches, it is just as easy to make a slip in the
million dollar column as it is in the one dollar column?—A. If it is they have
not done it.
Q. Do you think we should wait until they do it before we take some
measure to see that this printing and circulation is in the hands of our own
officers?—A. Do I think we should wait till they do it? I do not expect they
will do it.
Q. We did not expect last year that the Home Bank would fail—A.
The Home Bank was in a category by itself. Because there was wrong-doing
in one bank, you must not be suspicious of the whole fabric.
Q. It was in a different class from the Banque Nationale?—A. Yes,
there was nothing to be compared in the Banque Nationale, with the Home
Bank.
[Mr. J. C. Saunders.]
358 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. If we can come back, then, to the question of the Finance Act, I think
you said that the rate of interest charged by you 1s uniform at five per
cent?—A. It is five per cent.
Q. Except for the one exception you mentioned to Mr. Shaw?—A. Yes.
Q. You do not make a practice of varying the rate of interest, generally
speaking?—A. That is a matter of opinion, and our opinion is that five per
cent is as high a rate as the banks can stand, and their eagerness to get it
back again as soon as it is not being used rather supports that. They are
not anxious to take it unless business requires it, and they have not the
business resources to carry on. :
Q. Have you ever considered whether you should possibly at times
advance this money to the banks at three per cent, so they would be a little
more willing to come to you for this money?—A. We are not anxious for
them to take it. Personally I would rather have the banks get along without
the Fund at all.
Q. You are not anxious for them to make use of it?—A. No, I am not
anxious for it. :
Q. What interest rate do you pay on Treasury Bills?—A. We pay five
and a quarter per cent at present.
Q. And you allow these banks, I understand, to deposit Treasury bills
with you?—A. Yes.
Q. And you issue Dominion notes against them?—A. Yes.
Q. And you charge the banks five per cent?—A. Yes.
Q. Could you give the committee some reason why you pay the banks
51 per cent on Treasury bills, and then turn around and advance the bank money
at 5 per cent? Is that encouraging the banks not to come to you for loans?—A.
The banks do not use Treasury bills in that way at all. It is straight business
with them. They only come to the Finance Department for advances under
the Finance Act when they really need the money in their business. They get
cramped, and then put up securities and get the money.
By the Acting Chairman:
Q. I wish you would explain to the committee how, when the Dominion
of Canada wants money in its business, it pays the banks with whom you
discount your Treasury bills, 54 or 53 per cent, but when the banks need
money in their business, they borrow it from you and you only charge them
5 per cent. There does seem room for some explanation, and perhaps there is
an explanation.—A. We only have $5,000,000 against Treasury bills.
By Mr. Coote:
Q. Would you care to give the committee any further intimation of
why you loan the banks money at a lower rate of interest than they charge
you?—A. When we go to the banks for a loan, we have to go to them under
market conditions, and at present we are paying 54+ per cent for our out-
standing Treasury bills. When the banks get advances from us at 5 per cent,
they do not make a clear difference of that quarter per cent. They have
their overhead expenses which will add to the cost to them, and whatever
they charge I do not know; I have no means of knowing. The difference
between that would be what their profits are.
Q. Mr. Saunders, you say that when you loan this money to the banks
you charge them 5 per cent, but you do not follow it up to see what the banks
charge?—A. No, that is none of our business. We have made a business prop-
osition to them, and they have taken advantage of it. We just see that we
are secured, and we make a clear profit of 5 per cent on the transaction, our-
selves.
{Mr. J. C. Saunders.]
BANKING AND COMMERCE 359
APPENDIX No. 1
Q. And still you are not anxious to carry on this business?-—A. No, I am
not. I would rather have our note circulation on a purely gold basis.
Q. That is the reason why you made that other statement?—A. That is
the reason, personally, I would like to see our circulation on a gold basis.
By Mr. Benoit:
Q. One hundred. per cent of gold currency?—A. No; the gold basis does
not mean dollar for dollar.
By Mr. Coote:
lon Q. Will you explain what a gold basis is, Mr. Saunders?—A. In England
it is considered that 374 per cent is a percentage of gold to outstanding notes
that would warrant going on a gold basis.
The Actinc CHarrMANn: Gentlemen, I am going to make two requests.
The first is for the witness to just cast aside his usual modesty and speak out
loud. The second request is that the Committee preserve a religious silence.
Will you please repeat the question, Mr. Coote?
By Mr. Coote:
Q. What would you consider a Canadian gold basis?—A. Before the war
we were over 70 per cent of gold to notes outstanding. To-day we are about
72 per cent of gold to notes outstanding against gold. You see, we have notes
outstanding against gold, and notes outstanding against securities, and com-
bining the two we would be about 42 per cent.
By the Acting Chairman:
Q. Of gold?—A. Of gold against the whole thing. I may say to the Com-
mittee that personally I have advocated going on a gold basis.
By Mr. Coote:
Q. Would you explain to the Committee just what that would necessitate,
going on a gold basis?—A. Freeing gold.
Q. I think you should explain that a little—A. I will tell you. You see,
when you are on a gold basis, gold will move when the exchange rates get too
high. For instance, take my own case. We have large commitments in New
York yearly; perhaps I have to put over there twelve million or thirteen million
or fourteen million dollars a year. I have been enabled to do that without
meeting these heavy exchange rates that have been against us in the past by
moving gold. You can ship gold for five-eighths per cent. In ordinary business,
when you are on a gold basis, when the banks or whoever controls exchange
should say, “Here, I want 14 per cent to put these funds in New York,” you
would say, “No, I want gold for these notes of mine,” and you take the gold
and ship it at say five-eighths per cent, and you would get your money cheaper.
Do you not see that when gold moves, exchange cannot go above the cost of
moving the gold, very much. That is the principle of the gold basis.
By Mr. Benoit:
Q. There is no premium on the exchange of gold?—A. No.
By Mr. Coote:
Q. We were on a gold basis before the war?—A. Yes.
Q. Why did we not stay on it?—A. To conserve our gold supplies. As
soon as the War came on, if you remember it, Germany was trying to get gold,
and we had the scare ourselves, that some of it was slipping through Van-
(Mr. J. C. Saunders.]
360 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
couver and ultimately getting into Germany’s hands. So we put an export
prohibiticn on gold, and that automatically took us off the gold basis.
Q. A gold basis can only be maintained, then, when we are at peace?—A.
A gold basis can be maintained at any time if we do not prohibit the export.
As soon as you prohibit the moving of gold, you are off the gold basis.
Q. Do you thing we did the right thing to go off that basis?—A. Surely.
Q. Then on what ground can you want to go back on it now?—A. Because
there is no necessity. Germany can have all she likes of it, if she will pay
for it.
Q. When you run out of gold, how do you keep your exchange up?—A. I
do not think we can run out of gold, but that is the danger. This is my per-
sonal opinion. There are financiers who agree with me, and there are others
who do not disagree so much but they are a little timid just for that reason
that it might cause a run on the gold resources of the banks, and deplete the
gold resources too much. That is the reason I am a little timid of being forcible
in my opinion that we should go on a gold basis.
Q. I would like to pursue this subject further, but I think it is taking up
the time of the committee unnecessarily, so I think we will leave the question
of the gold basis. To come back to the operation of the Finance Act, you are
really conducting a sort of bankers’ bank? You refuse to advance notes to
any other concern than a bank?—A. The Act does not permit us to.
Q. Therefore you are really acting as a sort of bankers’ bank?—A. Yes.
No, not as a bankers’ bank, we are acting as a means of relieving business
throughout the Dominion. I would not say we were acting as a bankers’
bank.
By the Acting Chairman:
Q. Your organization is a place where bankers may obtain credit, but
nobody else can?—A. Yes.
By Mr. Coote:
Q. Then, when the banks come to you for an advance, do you take into
consideration the position of that bank, as to its standing, outside of the value
which you place on the securities which it offers to you?—A. We take into
consideration the position of the bank in another way, in their monthly return.
When we get the securities, if they are good we do not have to say to the bank,
“Are you good?” If they give us the securities it protects any advance we make
under the Act. We are only dealing then with one class of business.
Q. Can you tell, Mr. Saunders, from the reading of these monthly returns
which they furnish to you, whether the bank is really in a good or poor position?
—A. Certainly, I think we can; if their statement to us is correct, we can tell.
Q. Can you tell whether the statement is correct or not?—A. We have to
take them as correct until we know otherwise.
Q. You do take them as correct?—A. Certainly. Under the Bank Act we
have to take them. That is all Parliament gives us to do, get the statements and
declarations of the banks’ officials as to certain headings or certain classes of
business which they do, and upon which they make a return to the Finance
Department.
Q. Do you not think you should really know more about the condition of
the banks before you advance them money under the Finance Act?—A. No
I do not see any connection between their position and us. If a person came to
you and gave you good security, you would not care if he was the most insol-
vent man in the country.
Q. If you go to the bank and want a loan, no matter what the security
is, they want a statement from you.—A. That is a matter of credit.
{Mr. J. C. Saunders.]
BANKING AND COMMERCE 361
APPENDIX No. 1
Q. Did the Banque Nationale have money advanced under the Finance
Act?—A. Yes.
Q. At the time it was taken over by the Bank of Hochelaga?—A. Yes.
Q. And you did not know anything about the condition that the Banque
Nationale was in?—A. I knew they were having trouble.
Q. Did you know how they got into trouble?—A. Yes, I had a good idea.
Q. Was it through making certain large loans?—A. I understand so, what
they call “frozen assets.”
Q. If we had a section in the Act which limited the amount of loans which
any bank could make, to a percentage of its capital, would it not prevent a
large number of these big frozen loans? Would it not safeguard the deposits?
—A. The merits and demerits of that, I would not like to give my opinion on;
I really would not know. I know that was proposed at the last Session, that
the amount of a loan should be governed somewhat by the amount of the
capital of the bank. I would have no remarks on that; I would not like to make
any remarks one way or the other.
Q. I should think you would be in a position to advise this committee,
This measure was proposed last year, and I think it was turned down by the
committee. Have you seen any reason in the last year to lead you to believe
that this would be a wise provision to insert in the Act?—A. I would not like
to say it would, because I know it is claimed that you would cut off a great
deal of business now enjoyed by the banks with people who have large credits.
They would have to divide it, go from one bank to another. They would prob-
ably get it eventually, but they could not place it all with their own bank. As
to tue merits of that, I would not consider myself an expert. I am a national
finance man, rather than a commercial finance man. If you want just my
personal opinion, I do not think they should be interfered with at all.
Q. Do you know whether some of the present banks have not too large an
amount of their capital tied up in frozen loans?—A. No. I may say that if you
took the trouble to examine the annual returns of the various banks to their
shareholders, you would find that the average liquidity of the banks is about
50 per cent of their assets.
Q. And if they had a lagge amount of the other 50 per cent in frozen loans,
that would not be a good position?—A. I would not say as to that. I would
not say that that other 50 per cent is all frozen.
Q. Would you consider that a loan to a company which is in liquidation is
a frozen loan?—A. A loan by the bank?
Q. To a company which is now in liquidation? Would that be considered
a frozen loan—A. I do not see who would make it.
Mr. SHaw: A loan alreay made.
The Witness: I am not accustomed to being a witness, and I am afraid
of answering some questions without thoroughly understanding them, so if I
do not speak very clearly that is the reason.
The Actinc CHarrMAN: Take your time, and be sure you thoroughly under-
stand the question before you answer.
By Mr. Coote:
Q. The question I want to put is this. In the case of a loan which has
been made to a company by a bank, that company afterwards going into liquida-
tion, with the loan still unpaid, they are owed by that company to the bank.
Would you consider that to be a frozen loan?—A. Mr. Coote, it would depend
on how badly the company was involved. A company might go into liquida-
tion and come out practically square, or nearly square, but if it were hope-
lessly involved, of course it would be a frozen loan.
[Mr. J. C. Saunders.]
362 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By the Acting Chairman:
Q. Forgive me if I ask a question, but I do not want a mistaken impression
to get to the committee. Suppose a bank had loaned to a company 1n Niquida-
tion, a considerable sum of money, but had got security, say warehouse receipts
on good commodities, the fact that the debtor was in liquidation might not
prevent the bank, within a reasonable time, from realizing in full, if the security
were good.
Mr. Cootr: That is not the case which I am trying to present to the wit-
ness.
The Wrirness: You are referring to a loan on the credit of the company, on
the general credit?
By Mr. Coote:
Q. A loan which was made to the company probably long before it went into
liquidation.—A. And not secured except on the general credit of the company?
Q. I am trying to get some definition as to what is a frozen loan——A. A
frozen loan is a loan that you cannot readily realize on. I believe the trouble
with the Home Bank is these loans on timber lands in British Columbia, which
could be well designated as frozen loans, because there is not much likelihood
of their being realized on, perhaps for years.
The ActinG CHAIRMAN: Do the present returns which you are giving afford
you sufficient information to enable you to determine the real standing of the
banks?
Witness: Absolutely so, unless there is really knavery or roguery.
Mr. W. F. Macuran: Does it catch the roguery? That is the point.
By Mr. Coote:
Q. Would you be able from those returns to tell whether a bank had loaned
all its capital to one concern and that that concern was in the hands of the
liquidator?—-A. From the returns?
Q. From the returns now being furnished to you?—A. No, I would not
have that knowledge, unless in examining the retugns of that bank I was not
quite satisfied, and I would be justified in asking the bank to clear up anything
that did not seem to me to be clear or that I did not understand.
Q. You are at present receiving returns from fourteen banks. Are you sat-
isfied in every case that these returns are showing the true condition of the
banks?—A. I certainly am. I have no reason to think that any bank is doing
anything that is not right in the returns. If they are, I would be helpless.
Mr. W. F. Mactzan: Then why the inspector-general that the Minister
is providing for?
Hon Mr. Ross: Do you object to it?
Mr. W. F. Macrtean: No, I want it. That proves the necessity for it.
The Department would not admit that it was necessary.
Witness: I beg your pardon. I admit that if this inspector-general is
appointed, one of the things he could do would be to verify the returns under
the various headings sent to us by the banks, and he would do so.
By Mr. Malcolm:
Q. In the course of examining those reports, have you found them satis-
factory’?’—A. Yes.
Q. But occasions have arisen where you have enquired further to establish
certain facts in your mind that you doubted in the reports?—A. Not that I
doubted, but that I did not understand.
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 363
APPENDIX No. 1
Q. To clear up matters in the reports that you thought needed to be cleared
up?—A., Yes.
_ Q. Having got the further information by request from the bank as to
a affairs, you act in what way?—A. Well, if they are satisfactory I do not
act.
Q. After getting reports from the banks, as Mr. Coote suggests you find
that their assets are too largely centered in a few accounts, what is the
procedure?—A. Mr. Malcolm, I do not think I am called upon to decide just
what the bank shall do with their assets, or shall not do. That is banking
business and I am not in the banking business.
Q. That is all right, but what I am trying to get at is to establish the
fact there is a need to relieve the Finance Department of the danger of reports
not being accurate. The Minister has seen fit to propose that an examiner or
some official should ‘be appointed to assist you. If the statement made by a
bank to you was not entirely satisfactory to the Finance Department, you
would enquire further?—A. I certainly would.
Q. You would be in a more difficult position to correct it, after you got
the information, than you would be in if there was an inspection at the head
offices to prevent a bank from getting into that condition——A. Yes, of course
it would be more difficult if we found that a bank were in such a condition.
Q. In other words, inspection of the head offices which would, in my judg-
ment cover those large accounts—an inspection of the head office by a Govern-
ment inspector would take away a lot of the danger of those large accounts
existing at all?—A. Yes, it would have that effect.
Q. In your knowledge of banking, you have had occasions, I suppose, where
you found accounts of the bank frozen, in a rather non-liquid condition as a
result thereof. You have known that to occur in Canada?—A. From the
returns sent to us?
Q. That happened in the Home Bank?—A. Yes, but that did not show in
the returns.
Q. Of course not, but you know that that occurred?—A. Oh, yes.
Q. You have information that in almost every case where that state of
affairs has existed, it has been the result of head office loans?—A. Apparently. ,
Q. There has never been a case in Canada, to your knowledge where a bank
has become involved through lack of head office inspection of its branches?—A.
Well, I would not know; I do not know any.
Q. You will admit that in any banks that have become involved the loans
have been head office loans; the loans which have caused difficulties to the banks
have been head office loans?—A. Yes, so far as I know.
Q. You feel that if the Finance Department had an inspection of head
offices, it would eliminate the danger of this type of loan which existed, causing
frozen assets of the bank which they could not liquidate?—-A. Yes, it would
help.
"6. Head office inspection would cover the point?—A. If the officer was a
good man and understood his business it would help.
Q. As to those loans, have you found under section 88 advances made to
corporations by the banks to be of a type that. would keep the bank from
liquidating in a reasonable length of time?—A. We have no details of the loans
under Section 88. The way we touch on that is where notice of intention is
filed.
Q. In the ordinary course of banking business you have no information?—
A. No.
Q. But on the occasions when you have inquired further and you got further
information—I am not asking you to reveal anything confidential to the De-
(Mr. J. C. Saunders.]
1— 36
364 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
partment that you know at present—I am asking for information in regard to
things that are past and that do not bear on the present condition of the banks—
have you not found that under Section 88 hypothecation of liquid assets in most
cases has been easily realized upon?—A. I have never gone into that field;
I have no personal knowledge.
Q. Of how the loans were made that were dangerous loans?—A. No.
Q. To cite a case that is well-known to the public, and that will not impair
the credit of any existing bank, in what from of hypothecation were the timber
lands in British Columbia given to the Home Bank as security for loans?—A.
That was an internal arrangement with themselves.
Q. It was not under Section 88?—A. The bank held the licenses.
By the Acting Chairman:
Q. The licenses were transferred to the bank?—A. The licenses were trans-
ferred to the bank.
By Mr. Malcolm:
Q. It was not an ordinary banking business; it was a speculative gambling
business, was it not?—A. It was a mighty bad business.
Q. Do you think that a bank inspector appointed by the Government to
look into head office Icans would sanction that type of loan?—A. I am sure he
would not.
Q. In other words, you do not think that that would be good banking?
—A. No.
Q. If the bank had made a loan of that type on that kind of security, what
would the inspector have done, or what would the inspector do after the loan is
made?—A. I do not know; there has not been an inspector yet. I do not know
what he would do. He would be a man with banking experience and banking
knowledge, but what he would do I do not know. That is out of my financing
experience.
Q. What I am trying to get at is, what position would you find yourselves
in supposing another bank made that type of loan on a timber license which is
not easily saleable and which would be hard to realize on, thereby freezing a large
portion of its assets; supposing the inspector found that out, he would then be in a
position to report that condition?—A. Yes.
Q. Then, to use a vernacular expression, it would be up to you?—A. Up to
the Minister.
Q. Up to the Department. What would be the result even if we had an
inspector and he found that situation existing? What would be the protection
for the depositors?—A. I imagine that the Minister would get in touch with
the bank and try if possible to straighten it out so that it could recover itself.
If it was hopeless, I think that under the provision he would call in the Bankers’
Association and put in a curator.
Q. Then the fact would be, even if we had a Government inspector that a .
condition might arise under Government inspection of a loan being made on
certain terms which would freeze the assets of the bank to an undue extent, and
the inspector would report to the Finance Department, and the bank would be
in the same position as if the Finance Department had found it out without the
advice of the inspector?—A. I do not quite understand.
Q. What I am trying to say is that inspection is only inspection, it is not
management?—A. Surely.
Q. And if the condition was not satisfactory to the Minister of Finance or
to yourself from the statement of the bank, and you privately investigated and
found that by an undue amount of money being loaned on security not easily
liquidated, the bank’s condition was not very liquid, the Minister would then be
(Mr. J. C. Saunders.]
BANKING AND COMMERCE 365
APPENDIX No. 1
obliged to do some private negotiating to try and put that bank into a more
liquid condition. If you appoint a Government inspector, the same condition
might exist. The only difference would be that it would be more likely discovered
and reported to you?—A. Surely.
Q. Now, Mr. Saunders, what in your opinion would be the wiser course
for this committee to recommend in order to prevent a bank making such large
advances against non-liquid securities, so that this condition could not arise at
all?—A. I do not know just how to answer that question, because I cannot
understand a bank making a big advance on non-liquid security.
Q. The fact exists that they do make that sort of advances.—A. Have they
not been led into it step by step, and then by trying to save themselves they get
involved, the way the Merchants Bank did?
Q. The condition has existed—A. Yes.
Q. In other words, bank inspection will be a help, but it will not. prevent
that condition?—A. No. I may say that my opinion is that if some of the banks
who got into unfortunate circumstances, as soon as things did go badly, had
taken their losses, and stopped there, they would have been saved, but they
tried to nurse the thing along and got in deeper and deeper.
Q. You would not like to hazard an opinion as to what the committee should
consider to avoid that condition being brought about in a bank?
Mr. Goov: The limitation of loans, you mean?
By Mr. Malcolm:
Q. The question of security as to liquid assets?—A. My opinion is that
bankers are trained business men, and that it would not be advisable to
interfere with their own business principles, and the running of their business
too much, that we should not be a grandfather to them, because they do not
need it.
Q. But, Mr. Saunders, you realize the responsibility of the Government
of Canada to depositors, when we have government control of banks, and if
recommendations or regulations could be included in the Act which would
eliminate the danger of a certain set of conditions being brought about, not by
the good banker but by the speculative or gambling banker, it would be in
the public interest to have these regulations introduced?—A. My opinion is
that you cannot control the bad manager or the speculator in business by
legislation.
Q. Then you think the only hope is to have inspection, so that it may be
detected at as early a moment as possible?—A. I think perhaps that would be
the better plan.
Mr. Irvine: Mr. Chairman, I would like to ask one or two questions.
The Acting CHarrMAN: I would be glad to have you do so, sir, but Mr.
Coote asked me privately whether he could ask one or two more questions to
finish.
Mr. Coote: With Mr. Irvine’s permission.
Mr. Irvine: By all means.
By Mr. Coote:
Q. I just wanted to ask Mr. Saunders a couple of questions regarding
these monthly returns. Will you tell the committee, Mr. Saunders, what is
meant by “bills payable” by the banks?—A. That is bills they owe.
Q. Could you explain to the committee how a bank, or what bills a bank
would owe amounting to $7,000,000? That is a little hard for some of the com-
mittee to understand, why a bank would owe bills to that extent—A. The bank
(Mr. J. C. Saunders.]
1365
366 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
must have been realizing on some securities, getting the moneys to go on, and
they owe that money. Banks often raise money on their resources, you know.
Q. Do they borrow money, outside of what they borrow from you?—
A. I do not know the management of a bank business. As I said before, if
am trained in national financing. I cannot go into the banks and determine
what is the detailed nature of their business; I just know that they give an
amount “ bills payable.” I know what bills payable means; when we get them
we have to pay them. ;
Q. I think the committee would understand it regarding private parties.—
A. What it is composed of I would not know; it is not necessary for me to
know.
Q. Some of the committee are at a loss to understand how the bank would
have bills payable of $7,000,000. You cannot explain that?—A. No.
Mr. Benorr: I was under the impression it was over eight and a half million.
Mr. Coots: This is the total. I saw returns issued a year ago, and one
bank had close to eight millions itself, while the other banks had comparatively
small amounts.
The Witness: Supposing a bank was doing business with agents or other
banks at far-off places, they would have bills payable to another institution,
and they would have bills receivable from other institutions who owe them.
By Mr. Coote:
Q. Yes, but you know there is a heading in this bank return which shows
balances due to other banks, and correspondents in both foreign countries and
this country, and this is altogether outside of that. Then there is the heading,
“ Acceptances under letters of credit outstanding.” If, for instance, you saw
that one year a bank had $3,500,000 outstanding under that item, and the
following year it had $20,000,000 outstanding under it, would you look into
that matter and try and get some explanation for an increase like that in a
year, under that heading?—A. That would depend upon the travel. People
go to a bank and get letters of credit, sometimes there is more volume in that
business at different seasons of the year. People are going over to England
for the Exhibition this year, and there will likely be a greater volume of business
under that head than there would be in the winter months.
Q. But this $20,000,000 I have here, I think, was at the end of February,
and it seemed a very large amount when a year ago the bank had $3,000,000.—
A. What are you comparing it with? How much was in February?
Q. $20,000,000—A. And with what date were you comparing it?
Q. With the year previous, the same bank—A. If you remember, in your
revision of the Bank Act last year, you changed the law about that, and did
not allow them to carry this business on in the same way.
Q. It is due to the change in the Bank Act?—A. To the change in the
Bank Act.
Q. Just one other question, then. You have heard, of course, about cer-
a eee files that were in your department regarding the Home Bank?
—A. Yes.
Q. Were you aware that this confidential file was there?—A. No.
Q. Are you aware whether there are any more confidential files regarding
any other banks?—A. Now, Mr. Coote, a confidential file is a Minister’s file,
practically. The departmental filing and the Minister’s filing are two differ-
ent things. The Minister has a file of his own, and if he has any communica-
tion with a bank which is confidential and is held confidential, I might not
know anything about it unless he consulted with me. It would be confidential
{Mr. J. C. Saunders.]
BANKING AND COMMERCE 367
APPENDIX No. 1
until such time as he sent it out and said to put it on the departmental file.
Q. You are not aware that there are any?—A. No, I have no knowledge
of any confidential files.
By Mr. Irvine:
Q. Mr. Saunders, you are an official of the Department of Finance, of
course.
Q. And you have some expert knowledge of the financial questions gener-
ally?--A. I would not say expert knowledge; I have a knowledge that I have
obtained through experience in our own work, in national financing.
Q. My point is that if you offered an opinion, for instance, on the gold
basis as you have done, you would like that opinion to be creditable to the
Department of Finance of Canada?—A. But I qualified that opinion on the
gold basis. To show you how much I respect my expertness, I said there were
high financial men who were a little fearful of going on a gold basis as I in my
humble opinion thought we could, and that rather jolted me.
Q. I am only going to ask one question about it. Would you wish it to
go on record that the sole reason why we discontinued the gold basis during the
time of the war was to stop the Germans from getting our gold?—-A. No, I will
put it this way. The reason we discontinued the gold basis during the war
was for war purposes.
Q. That is a very general answer, but I will take that where I would not
take the other—A. Perhaps I should not have brought in the Germans.
By the Acting Chairman:
Q. That was all right; that was one of the reasons?—A. Yes.
By Mr. Irvine:
Q. Is there anything, Mr. Saunders, you would recommend to this Com-
mittee that would be of assistance in the protection of depositors in the future?
Would you have any recommendation to make?—A. No. I think really the
appointment of this inspector as suggested by the Minister of Finance would
be as far as we could go, and would help considerably if not totally to protect
the banks in the future.
Q. Did I understand you to summarize the functions of this proposal of
the Minister of Finance a moment or two ago as being two-fold, namely, as
a nursery for weak financial institutions, and then if that failed, as an under-
taker to bury them?—A. I do not like your description. I think this way,
that it would give the Finance Department a little more assurance as regards
the position of the banks if an official of the Department should verify the
position of the banks from the figures sent in. Then, if the banker is getting
a little off the track of sound business principles you could advise with him and
nurse the bank back again, but if it were hopeless, I would not call it under-
taking, I would ask. the Bankers’ Association to send in a Curator.
Q. You have expressed great faith in the bankers?—A. I have.
Q. Would you be in favour, then, of eliminating all control of banks from
the Finance Department, and giving it to the Bankers’ Association?—A. I would
not.
Q. Why not, if you have great faith in them, and if they have all the
information now, and if you cannot even doubt them; why not let them manage
it? I want vou to tell us why vou would not.—A. I would let them manage what
is left to them to manage. Under the Act we are managing them pretty well’
now. ‘The restrictions under the Act are great. Did you ever study, Mr.
Irvine, the merits of this present Bank Act over the last Act? Did you ever
look into it closely?
(Mr. J. C. Saunders.]
368 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. I have, but I am not answering questions just now. I have studied it
a little, but I want your opinion as to why you would not allow them to have
full control over the banking situation? They are efficient, according to you,
and they are very honest, so much so that you cannot even doubt them.—A. In
England there is no such control over the banks. In the banking institutions
in England they do not have any such control as we have here.
* Q. Then why not eliminate it and go on the English basis?—A. I am not
called upon to answer that.
Q. You have no recommendation to make?—A. No, I would not express
an opinion.
By Mr. Speakman:
Q. There is one thing I would like to ask on the evidence already sub-
mitted. I understand, Mr. Saunders, from your explanation of the Finance
Act, that the Government may loan to the banks for the carrying on of their
business money in Dominion notes to an amount limited by the demands of the
banks and the security given?—A. Yes.
Q. And the most desirable collateral is Dominion nalisett aees Dominion
bonds and Dominion guaranteed bonds?—A. Yes.
Q. I also understand that the Government borrows from the banks certain
monies for carrying on its business operations?—A. Yes.
- . I would like to ask you if you would hazard an opinion as to the pos-
sibility of the Government borrowing from itself on the strength of the same
collateral which it now uses as a basis for loans to the banks, loaning the same
money to itself under Dominion notes, which it now borrows from the banks
in that roundabout way,
The printed bills that we have now outstanding are not recent ones. They are
war treasury bills that amount to about $91,000,000. They are the residue of
$143,000,000 which we borrowed from the banks in war time. There is no dis-
position on the part of the Finance Department now to make any borrowings
from the banks. We have reduced the amount from $143,000,000 to $91,000,000,
and I would hke to get them further out of the way if we could. But there
is not much prospect in the near future of making many further reductions. The
Finance Department feels that it will not be necessary to go to the banks to
borrow any monies at all. We have not been borrowing, from the banks for
years. We are trying to reduce what was borrowed during the war time. These
are war time left-overs, these treasury bills.
Q. I understand then that the ‘Government has ceased to borrow any
monies from the banks, but at the time they did borrow, the security was the
same security upon which the banks may now borrow money from the Govern-
ment, that is, Dominion obligations?—A. At the time we did borrow during the
war, yes.
Q. You used Dominion obligations as securities in the form of treasury
notes?—A. Oh yes, we gave them treasury notes.
Q. And at the present time, these Dominion obligations in another form, in
bonds or guaranteed bonds, are being used by the banks as a basis for their
borrowing?—A. Just a fraction. They are holding the treasury notes in their
vaults as an investment.
Q. You have not considered the possibility of utilizing these Dominion
obligations as a means for self-advancement?—A. Oh no, the Minister would
put me out if I did that. I try to do sound financing in the Finance Department;
I would not consider that sound financing.
Mr. SprAKMAN: I have been trying to follow your evidence logically and
without any disposition towards wild finance, I have been unable to see the
{Mr. J. C. Saunders.]
BANKING AND COMMERCE 369
APPENDIX No. 1
difference between lending Dominion notes for Dominion obligations, and lending
to the Dominion government under Dominion obligation.
The witness retired.
The Committee adjourned until 3.30 p.m.
AFTERNOON SESSION
The Committee resumed at 3.30 p.m., the Chairman, Mr. Vien, presiding.
The Cuatrman: Gentlemen, I understand that Mr. Saunders has some
further explanations to give to the Committee on a point that was raised this
morning. I suppose the Committee will not have any objection to his taking
the stand again.
J. C. SAUNDERS recalled.
By the Chairman:
Q. I understand, Mr. Saunders, that you would like to tell the Committee
something additional?—A. Just to amplify what was said here this morning in
connection with the knowledge or control that some members expressed that the
Finance Department should have over the delivery of notes that are printed for
the banks. The Department under the law has to leave that to the Canadian
Bankers’ Association. What I did not say but might have said is that the
Canadian Bankers’ Association as a practice, monthly, send us a report of their
findings. Of course, we are not responsible for it, but we have knowledge in
that way of what is going on in connection with the delivery of notes to the
banks by means of this monthly report which the Canadian Bankers’ Association
find to be the fact after inspecting the banks in that respect monthly.
By Mr. W. F. Maclean:
Q. Is there a Government savings bank in connection with your Depart-
ment?—A. Yes, very limited.
Q. What is it called?—A. The Dominion Government Savings Bank.
Q. Where does it operate to-day ?—A. In Prince Edward Island, at Halifax,
St. John and Victoria.
Q. That is in the Maritime Provinces and the Pacific Province?—A. Yes.
Q. Is there a Deputy Receiver General’s office in Toronto?—A. We call him
Assistant Receiver-General.
Q. That Department at one time did take private deposits?—A. Yes.
Q. Will you tell us under what circumstances that very active Government
savings bank ceased to operate in Toronto and when?—A. Mr. Maclean, the
policy of the Department is—you see the Post Office Department has savings
banks all over the country in small places, and it was a case of the Department
of Finance maintaining a separate one, and our deposits from the public kept
growing less and less, and the management of it became pretty expensive and
were transferred whenever we could transfer them to the Post Office and let
the Post Office handle the whole thing.
Q. And you will have the same thing in the Maritime Provinces?—A. Yes,
as soon as we can. I have it in mind to do that.
Q. They are still operating»in the Maritime Provinces?—A. Yes.
Q. I want to know why such an excellent system of Government savings
banks with ample security is being discontinued, and why it is being discon-
tinued in my own province, particularly in the city of Toronto. Why did it
cease to function as a Government Savings Bank in Toronto?—A. The Assistant
(Mr. J. C. Saunders.]
370 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Receiver General’s office in Toronto is a very busy office. It does a tremendous
volume of business in taking care of the banking facilities in the province
of Ontario. In addition to that, we have put on to them the handling of our bond
issues, and to carry on savings accounts there with the public would entail quite
a bit of overhead expense which could be handled by the Post Office. The Post
Office takes care of the Toronto savings.
Q. Could a client of that savings bank who had money deposited check
it out?—A. He had to give notice.
Q. In a Government savings bank?—A. Yes.
Q. They could not get a marked cheque?—A. No.
Q. And in the Maritime Provinces and British Columbia they can not get a
marked cheque against their deposits?—A. No.
Q. Why should not a depositor in the Government Savings Banks have
the privilege that the public have in the other savings banks of checking out
their money?—A. I believe that the Post Office Department are now making
arrangements to modify that to a certain extent so that a depositor can at
once draw up to a certain sum.
Q. I have a notice on the order paper to that effect. I want that to
come out. Dou you know anything about the Government Savings branches
in the Province of Ontario?—A. No, that does not come under the Bank Act
at all.
Mr. W. F. Macuran: I have got the answer that this excellent Govern-
ment savings bank that we had in Toronto—
Mr. Hueuss: Is it excellent?
Mr. W. F. Maciean: It can be made excellent but somebody conspired to
close that office in Toronto. That is the charge I am making. It was not done
by the present Government it was done in the old days, but it was done. I will
make an argument further on, but I have got the admission of the Department
that the excellent Government savings bank which did function in Toronto has
ceased to function now and does function in these other provinces. I want you,
Mr. Chairman, if the Committee will join me in asking for it to have a repre-
sentative of the Government’s savings branches in the Province of Ontario come
here and give evidence as to the Government organization in that province. I
suppose you may have to address the Prime Minister of Ontario or the Provincial
Treasurer but allow him to come here and give evidence as to the workings of
that savings branch in Ontario. I will make that a motion. ~
By Mr. Healy:
Q. Mr. Saunders, did I understand you to say, or rather did you say this
morning that the Home Bank bills when used were as good as any other bills?—
A. Yes, to the public; I do not think there is any doubt of it.
= . eee do I, but let me quote from Mr. Justice McKeown’s report, page 25.
eads).
“The total paid-up capital and reserve of the bank had been lost.”
What is the legal basis of the issuance of currency under the Bank Act?—A.
pico os inks of notes by the bank itself to the extent of the unimpaired paid-up
capital.
Q. So that in 1916 there was no legal right for the Home Bank to issue any
notes?—A. No, and yet if they issued any additional notes—you know that
one of the main things a bank tries to do is to put out its circulation, and as soon
as the bank is able it will get a circulation equal to its paid-up capital. If the
Home Bank, previous to the point where you say it had its capital unimpaired—
supposing it had out a certain circulation in 1913, could we not take that as a
date at which its paid-up capital was not impaired?
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 371
APPENDIX No. 1
Q. I will assume, for the sake of argument, that it was unimpaired until
1916?—A. Its unimpaired capital then was $1,939,300, and it had a circulation
out of $1,666,000, a couple of hundred thousand dollars less than they could
have if they wished. That circulation has never been lessened. It was out
legally, it was out against the bank’s unimpaired paid-up capital. If the bank
desired, or if they found their capital impaired at any time, what would be the
result? They would have to call in a certain part of their note issue so that
they would have a note issue equal to their unimpaired paid-up capital. Where
would that get them to? It would not help the depositors any; they would have
to sell or make use of one of their assets. They would have to lessen their assets
to represent those notes out of circulation, and the depositor would be as he
was. The depositor obtains no help, or liability, you might say, for the note
issue of the bank. That does not work in any way to help or otherwise the
depositor. That is the way I look at it.
Q. That is your opinion?—A. That is my opinion.
Q. I am glad to have it. Now I am going to see how the facts work out.
It lost its legal right to issue notes in 1916, entirely?—A. Yes.
Q. That is correct. Remember that is what Mr. Justice McKeown finds?
—A. I have not studied the report.
Q. He finds that the total paid-up capital had been lost in 1916?—A. Well
then, that is the fact.
Q. For the sake of argument, we will say that the total capital out on that
date was $2,000,000; it would not be quite out?—A. $1,805,000.
Q. Was out on that date?—A. Yes.
Q. Illegally?—A. I doubt after the bank closed its doors.
Q. Whatever circulation was out on that date, was out illegally? Is that
right?—A. Yes.
Q. And it was out illegally from 1916 to 1923?—A. Yes.
Q. Until the bank closed its doors. And it was under the jurisdiction of
only two people, or two concerns, at that time—the bank itself and the Canadian
Bankers’ Association. The Government had no jurisdiction over it, is that
right?—A. Yes.
Q. Then we come to the date when the bank closed its doors. The amount
of circulation out was represented in the total assets by some form of security?
—A. The amount in circulation out was represented—
Q. In the total assets, because it had been put out on something?—A. The
net circulation was a liability, and there were assets against it.
Q. Had the paid up capital not been depleted, how much would the assets
have been increased?—A. You mean if it was—
Q. If the capital was still intact, unimpaired, how much would the total
assets on the day the bank failed have been increased?—-A. By the value of the
$2,000,000 of its liability. That was in their assets somewhere.
Q. Exactly, because the note issue was illegally out and the depositors
finally lost the total amount of the issue out on the day the bank failed?—A. I
do not hold that, and I will tell you why. If the note issue was, as you say,
illegally out and if it had been taken up and not allowed to be illegally out, the
assets of the bank would have to be depleted to bring its notes in.
Q. Correct. If it had been taken up in 1916, the depositors would not have
lost a cent. Mr. Justice McKeown so finds?—A. I hardly think that he would
find it was the circulation. It was the assets. In 1916 that would have taken
care of all that and all the depositors too, not the circulation.
Q. That is the finding, and I think I will be able to refer you to that in his
judgment?—A. I have not seen the report, but if it is as set out in the paper
last night, the depositors would not have lost anything in 1916 but that was on
(Mr. J. C. Saunders.]
372 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
account of the bank being in such a position that the assets of the bank could
have taken care of the depositors. But the circulation would have nothing to
do with the safe-guarding of the depositors.
Q. Am I right in saying this: When it was discovered that the bank had
no legal right to issue notes, which was the year 1916, had the circulation been
called in at that time, would not the depositors have been saved the loss?—A.
No, Mr. Healy, the depositors would have to call it in; they would have to
sacrifice the like amount in their assets, which, before calling it in, would be a
protection to them. They would have to give up their protection to that extent.
Q. I do not know whether you get my point?—A. I think I do.
Q. At a certain time in the history of this bank it was discovered that the
note issu¢ was entirely illegal, and that happened to be the year 1916. Had
the note issue been called in at that date, Mr. Justice McKeown finds, and I will
refer you to the page, that the depositors would not have lost a cent?—A. I can
hardly credit that Justice MeKeown—
Mr. Hucurs: What he says is, if the bank had been wound up on that
date?
Wirtyess: Not having read the report I would say he must mean that the
depositors would not have lost a cent because the assets of the bank, which do
not include the circulation would have provided for the relief of the depositors,
but if the note circulation had been drawn in, they would have to have lessened
those assets to take in the illegal circulation, which would have made their assets
so much less, as applying to the depositors losses.
By Mr. Healy:
Q. Here is the statement, on page 20. This is under the heading “ Answer
to question 4”. (Reads).
“(a) Liquidation immediately following such audit or
“(b) Amalgamation with another bank.
“And the effect of such audit upon the position of the present deposi-
tors:—
‘If made in 1916 the present depositors would have suffered no
loss.”
A. You have not given me anything there about the bank circulation. I claim
that the bank circulation is altogether apart from the assets.
Q. Please excuse me; I get your point exactly but you apparently do not
get mine.—A. Oh, yes, I do, but I do not value it.
Q. I am sorry, because it is really valued at $2,000,000, in my opinion. I
claim that whoever was in charge, should have called in the circulation of the
Home Bank in 1916. Had that been done, the Bank would have been wound up.
Is that right?—A. No.
Q. Surely, if you called in the note circulation?—A. If you called in the
whole capital—
Q. Let me have your opinion, because on the same page I have Mr. Edwards’
opinion; he says the bank would have lost $3,000,000-——A. Anyone knows that
if the capital is gone the bank is gone.
@. Did you answer my question, that had the circulation been called in,
the bank would have been wound up?—A. Probably, yes; I do not see how it
could have gone on.
Q. And had it been wound up at that date the Home Bank depositors would
not have lost a cent?—-A. No, not on account of the circulation.
Q. The circulation was illegal, and should have been called in?—A. The
assets would have been reduced.
[Mr, J. C. Saunders.]
BANKING AND COMMERCE 373
APPENDIX No. 1
The CuarrMAN: You do not leave the witness sufficient time to answer your
questions, Mr. Healy.
Mr. Hearty: I allowed the witness five minutes to make an explanation
of the whole situation.
The CuairMAN: The two last questions you put, he did not have time to
answer.
By Mr. Healy:
Q. I will give all the time required. I had reached the point where, if the
illegal circulation had been called in in 1916, the depositors would not have lost
at all, according to the finding of fact in Mr. Justice McKeown’s report.—A.
If the bank had been wound up in 1916, they would not have lost a cent. The
circulation would not enter into it at all.
Q. Had the circulation been called in on that date, what would have been
the result?—A. The result would have been the resources, the liabilities and the
assets of the bank would have to be administered to reimburse so far as they
would go, the depositors and other claims on the Home Bank, and the report
does not say anything about the circulation.
Q. The bank would have been wound up; is that correct?—A. Yes, I
think so.
Q. Without loss to the depositors?—A. Yes.
Q. Therefore, by allowing this illegal circulation to continue from 1916
until 1923, the depositors not only lost $2,000,000, but they lost 55 per cent of
their total deposits?—-A. No, not at all. We do not agree on that.
By Mr. Hughes:
Q. I have a question or two that I would like to ask now. Mr. Saunders,
will you open the report at page xxxiv, and read under b, “And the effect of such
audit upon the position of the present depositors:—if made in 1916, the present
depositors would have suffered no loss.” Is that not a mistake, the word
“present ’?—A. That must be.
Q. The Judge must have meant the then depositors?—A. Yes.
Q. He must have meant that?—A. Yes, there is no doubt about it.
Q. It is either a misprint or a misstatement?
Mr. Heaty: It would be the present depositors at that time.
The CuarrMan: Order, please.
By Mr. Hughes:
Q. The word “ present” is incorrect, is it not, or is it?—A. It does look odd,
but if it were wound up in 1916 there would be no present depositors, there
would be only the depositors at that. time.
Q. Very well. If the bank had been wound up at that time, or if a proper
audit had been made at that time, the assets of the bank would have been
sufficient to meet all its liabilities to the public?—A. Yes, that is the way I
take it.
Q. That is the finding of the Judge?—A. That is the way I interpret the
finding.
Q. And the circulation had nothing whatever to do with that, either making
it better or worse?—A. That is what I am trying to impress upon Mr. Healy.
Mr. Hearty: The calling in of it had everything to do with it, and it was
out illegally.
The Witness: The circulation that is out, supposing there was $4,000,000
out illegally, the depositors would be helped by it, because that circulation must
be redeemed out of the Bank Circulation Redemption Fund, if the assets would
{Mr. J. C. Saunders.]
' 374 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
not cover it, and if their own deposit in the circulation fund did not cover it,
the other banks would have to lose it, and pay that, which would benefit the
depositors.
By Mr. Hughes:
Q. If a proper audit had been made at that time, and the real condition of
the bank in 1916 had been brought to the notice of the Minister or the Govern-
ment and they had taken action to have the bank wound up, then the depositors
would have lost nothing; the public would have lost nothing?—A. The Judge
Says SO.
: Q. That is the finding of the Judge?—A. Yes.
Q. And the losses which the depositors made later when the bank was wound
up did not result from the circulation of the bank, but resulted from the fact
that the bank had gone on doing business with an impaired capital, and’ this
condition was getting worse from year to year?—A. You have put it better
than I could myself.
By Mr. Good:
Q. Mr. Saunders, I think you stated this morning that if the monthly
returns sent in by the bank were either unsatisfactory to you or you did not
understand them, you required some special return or made some special inves-
tigation? Is that right?—A. No, I did not say we made any special investiga-
tion. I would simply, in my official capacity, write the bank officials, pointing
out anything I did not understand and get their explanation for it. I can do
that.
Q. Then the special investigation that you referred to would simply take
the form of a letter of inquiry from you to the bank?—A. Yes, and if it were
not satisfactory, if I had fears of some trouble, I would immediately bring it
to the Minister’s attention and ask him to exercise his privilege under section
56 A.
Q. On how many occasions have you made special inquiry?—A. During
my holding of the office, only once.
Q. Once. On what occasion was that?—A. I absolutely decline to give
any particulars of it. I found everything was all right, and that is all I can say.
Q. You regard that as confidential?—A. Not only confidential, but in the
public interest, especially in this unrest that is abroad. You know what
happened to the Dominion Bank in Toronto.
Q. Would you mind stating at what date you made that inquiry?—A. I do
not care to make any statement at all; I would rather not.
Q. Once since 1920, when you became Deputy Minister, is that right?—
A. Yes, I would say that. I do not want to refuse anything, but I think it
is better that I should not give any information.
Q. When the banks require metal coinage, with what do they pay for it?—
A. We put out the metal coinage, silver and copper, and it is held in reserve
in each of the A.R.G.’s offices.
By the Chairman:
Q. What does A.R.G. mean?—-A. Assistant Receiver General. Then if the
bank wants silver, they have to come with either gold or Dominion notes.
By Mr. Good:
Q. Legal tender?—A. Legal tender.
Q. And the Dominion Government exchanges the metal or token money
for the gold or Dominion notes?—A. Yes.
[Mr. J. C. Saunders.]
BANKING AND COMMERCE 375
APPENDIX No. 1
Q. I think you stated this morning that only once in your memory has
the rediscount rate, or the rate of interest charged for advances under the
Finance Act been different from five per cent? Is that right?—A. Yes.
Q: I think you also stated this morning that on no oceasion that you recall
was the matter discussed in the Treasury Board, as to the propriety of altering
the rate of interest. Is that right?—A. Yes. I may say, if you are going to
find fault with that, I would be the one to blame. I have not seen the necessity
for suggesting it to the Chairman of the Treasury Board.
Q. As a matter of practice, your suggestions and advice on these matters
and these questions have been accepted by the Treasury Board, have they?—
A. I am rather in the habit of saying a good many things, but they are not
necessarily accepted.
Q. In regard to the rate of interest under the Finance Act, do you recall
any instance when any member of the Treasury Board suggested a modification
of the rate?—A. No.
Q. And you never suggested it yourself?—A. No, I did not.
Q. Do you recall a condition of inflation during the years, say, from 1917
to 1920, in this country?—A. I do, but I was not Deputy Minister then, and
I was not so vitally concerned in these larger questions of finance as I would
be to-day.
Q. However, you recall the fact?—A. Yes, I know.
Q. Do you recall the fact that there was a deflation began in 1920, and
continued for a year or two?—A. Yes.
Q. Do you think it might have been good policy on the part of the Treasury
Board to have lowered the rediscount rate from 1920 on, in order to assist the
banks in carrying their customers and preventing the catastrophes that
occurred?—A. Mr. Good, in my judgment, especially after I took the office of
Deputy Minister of Finance, the banks had margin enough between five per
cent and what they would probably charge their customers to interest them in
taking charge of their customers and not allowing them to suffer for want of
assistance.
Q. You think, then, that no customers did suffer during that period from
pressure of the banks?—A. I have no knowledge of it.
Q. You have no knowledge of any distress caused throughout Canada by
pressure from the banks during that period?—A. No.
Q. In your position you would not be in the way of getting any such
knowledge?—A. No.
Q. Not even from reading the newspapers?—A. I do not take the news-
papers very seriously.
Q. Do you state to this committee that you have no knowledge of the
charges, if you like, or the protests being made by producers and merchants
against the policy of contraction of credit during these years?—A. Oh, yes, I
knew the banks were restricting their credits to conserve themselves, one might
say.
Q. Did you think that policy of contraction was advantageous to the
country, or had you no information on that point?—A. I am rather inclined
to think—I am not an expert in it—that if the banks did not save themselves,
if they allowed themselves to extend credit, and then went up, it would be
more damage to the country than any damage which might occur through
restricting credit.
Q. But you are not prepared to admit there was any damage done by the
rapid contraction of credit during that period. Do I understand you to say
that?—A. I would hardly like to give that as an answer; I would hardly like
to give my opinion in that respect.
(Mr. J. C. Saunders.]
376 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. Have you an opinion?—A. I would not express it, because it might not
be the right one. I do not think I am in a position to judge.
Q. That is, you may have a tentative opinion, but you have not sufficient
confidence in it to express it?—A. That is right.
Q. I do not think it is worth while to pursue this inquiry any further along
this particular line—A. Very well.
By Mr. Spencer:
Q. During your cross-examination this morning, Mr. Saunders, a few
questions occurred to me that I would like to ask you. You made the state-
ment that the borrowings through the Finance Act were a second charge on the
assets of a bank?—A. Yes.
Q. Then it would come after the notes, and before the Government
deposits?—A. No, it is among the Government claims. First is the call of
notes in circulation, and then the Dominion Government, and then the Pro-
vincial Governments, and fourth come the other claims.
Q. You mentioned that the Finance Act was being used a great deal a
few years ago, and to-day it was being used little, comparatively speaking?—
A. Yes.
Q. Can you tell me when it is used more, when the country is prosperous,
or when we have adverse conditions?—A. It would be used more when the
country is prosperous. In November, 1920, as I told you this morning, that
was the peak of all the years. The banks had loans under the Finance Act
amounting to $123,000,000. If you will recall, Mr. Spencer, in 1920 everything
was booming; it was after the war and there was inflation in prices and busi-
ness was booming a little, which naturally required more money. The dollar
was worth less, and it required more dollars to carry on business.
Q. That was my opinion. Then, Mr. Saunders, you would say that the
banks find it profitable to borrow through the Finance Act?—A. I think they
find it more useful in being able to meet business that is offered to them, when
their own resources would not permit. They cannot find it very profitable,
because they are so eager to get it back into our hands to save the five per
cent interest rate.
Q. Otherwise, when business is booming, they are only too ready to make
loans, and they deposit the securities with the Treasury Board?—A. Yes.
Q. You said that the banks made the most use of this privilege through
having large legals for clearings?—A. Yes.
Q Rather than placing the Dominion notes in the Gold Reserve and
issuing their own notes against them I think the inference you left was that
they used the most of them for clearings—A. For both purposes, but in a great
‘many cases just for bank clearings. That would be to save turning in their
own small notes and taking them to the Clearing House to liquidate their
liabilities.
Q. At the same time, in round figures, I believe we have about $9,000,000
in the Gold Reserve and about $50,000,000 in notes and paper?—A. Yes.
Q. Then would it not be more correct to call it a “ gilded” reserve, rather
than a Gold Reserve?—A. Call what a gilded reserve?
Q. The place we now call a Gold Reserve?—A. What is in a name, any-
way?
Mr. McMaster: “A rose by any other name would smell as sweet.”
By Mr. Spencer:
Q. You mentioned in answer to a question this morning when the discus-
sion turned on the subject of the Mint, that during the war there was too much
money in circulation. What sort of money would that be?—A. During the
(Mr. J. C. Saunders.]
BANKING AND COMMERCE 377
APPENDIX No. 1
war there was too much money in circulation? I hardly think I made that
statement.
Q It was with reference to Mr. Shaw’s question with regard to the Mint.
—A. Yes; during the war there was not too much, because it was needed for
the business, or it would not have been asked of us, but there was too much put
in circulation for present-day requirements. We do not redeem silver; that is
the trouble.
Q. It was silver you meant when you said that?—A. Too much silver, I
think I said.
@. How do you know there is too much silver money?
much silver is issued.
Q@. But how would you know when there was too much?—A. The banks
complain, trying to get us to take it back.
Q. You mean the people would not use it, and put it back in the banks?—
A. Surely, and the banks could not get it out.
Q. Have you, Mr Saunders, in your official position, anything to do with
the Post Office Savings Bank?—A No. That is administered by the Post
Office Department entirely.
Q. You would not like to give an opinion as to the policy. of the Post Office
Savings Bank?-—A. No. I mentioned this morning or this afternoon that the
Post Office was modifying its rules and regulations about withdrawals, so as
to make it a little easier for the smaller depositors to withdraw than it has
been hitherto.
Q. I think, in answering a question of Mr. Healy’s, you said the notes of
a private bank were no liability on depositors?—A. Yes. They are no direct
liability on depositors.
. Suppose we decided in Canada to have a Government issue of notes only,
and the only paper out was Government paper; when a bank went smash like
the Home Bank; when their own notes out, their own private notes were out in
circulation, would not the depositors be better off?—A. Not a bit. The bank
would get these Dominion notes, they would have to give value out of their
assets. It is the same relation; it does not matter whether they are Dominion
notes or bank notes.
Q. But with a private issue of notes, is it not a fact that the notes are the
first call on the assets of the bank?—A. Yes.
Q. And part of the assets of the bank are the depositors’ accounts?—A. Yes,
and others.
Q. And therefore the private notes of the bank are a call on depositors?—A.
Yes.
Q. But if there were Government notes issued instead of private notes, they
would not be a call on depositors?—A. I do not like the word depositors; it is
a call on the assets.
Q. The responsibility would be on the Government?—A. The responsibility
would be on the Government—.
Q. To meet the notes?—A. If they held Dominion legals or Dominion notes
of the Government, that would be a good asset, because the Government would
redeem them at once.
Q. Therefore, the depositors of a failed bank would be better off if we had
a Government issue or monopoly of note issue than they are with a private issue?
—A. Not at all. If they had Dominion notes in their possession and brought them
in to us to redeem them, they would be reducing their assets by that much.
Q. Dominion notes would be a lability on the government and not on the
bank?—A. Yes, but their assets have not been benefited at all.
[Mr. J. C. Saunders.]
A. We know how
378 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. McMaster:
Q. But in the case of the issue of Government bank notes, would not the
disappearance of the privilege which now goes to secure the notes of a private
bank, would that not put the ordinary creditor on a better footing?—A. I do not
think so. Nota bit. It is just a question of how the assets run.
Q. You would have the same assets as before, but they would be divided
among all the creditors.?—A. No.
By Mr. Benoit:
Q. Supposing you exchange dollar for dollar?—A. Yes, but you must take
into consideration how they get hold of these Dominion notes. They must put
up their assets, and when they redeem them they are just lowering their assets.
By Mr. Spencer:
Q. When a bank fails there are certain prior liens on the assets of that bank?
—A. Yes.
Q. The first lien on the assets of the bank is the private notes?—A. Yes.
Q. Except that they call on the Note Circulation Redemption Fund, to
what extent?—A. Provided the assets will not permit of the redemption of the
notes. That is a protection to the man who holds notes of the bank in which
he has no say. He is not a client of the bank and he must be protected in order
that the notes of a Canadian bank may pass like gold.
Q. But to what extent can the holders of the notes of a failed bank call
upon the Circulation Redemption Fund?—A. If the assets do not provide it, to
the extent of the deficiency in the assets to meet the notes.
Q. At once?—A. The liquidator would make up how much he needed at
present and he would call on that particular bank’s own part of the deposit in
the Circulation Redemption Fund. If that was not sufficient it would be taken
out of the general fund and distributed pro rata to all the banks and handed
over to him, and the other banks would have to immediately make up their
quota again.
Q. Let me take you over that ground again. Is it not a fact that when a
bank fails, the only call it has on the Note Circulation Redemption Fund is
what it has paid into that fund, plus the interest?—A. It would depend upon
the extent of the notes.
Q. I do not care how many notes are out. Before they come back on the
other assets of the bank, I want the first call on the Note Circulation Redemption
Fund.—A. Yes, they come and get it out of the Circulation Fund.
Q. To the extent of the amount they have paid in only, plus the interest,
each bank? Suppose the Home Bank fails, as it has, and it has $2,000,000 out
in notes.—A. Yes.
Q. And it has paid $100,000 into that fund. The only amount it can collect
on at once is that $100,000?—A. No, if the liquidators say, ‘‘ We need at once
$500,000, $100,000 of that bank and the rest from the other banks.”
Q. That conflicts with evidence we have had before. Why did they not do
it in the case of the Home Bank?—A. We have paid out everything the liquidators
have called for from the Circulation Redemption Fund.
By Mr. Irvine:
Q. Why not pay out more?—A. You get the liquidators to make a demand
upon it.
By Mr. Spencer:
Q. Your evidence then, does not coincide with the evidence given before.
However, after they call on the Note Circulation Redemption Fund for a certain
{Mr. J. C. Saunders.]
BANKING AND COMMERCE 379
APPENDIX No. 1
amount, the balance of the notes is a claim on the assets of the bank; do you
admit that?—A. The balance of the notes.
Q. The balance of the notes. Suppose there is $2,000,000 in notes. You
have only to make good on these notes to the extent of the $100,000 which that
bank has in the Note Circulation Redemption Fund. These notes remaining are
a first claim on the assets of the bank.—A. Yes, the whole $2,000,000.
Q. And if, when all this is swept away, including the depositors’ accounts,
if there are any notes left over, you can go back under the note circulation
redemption fund and get the balance. Is that a fact?—A. Well, hold on, I do
not think I understand——
Q. I am taking you step by step, and I think I am correct.
Mr. Goop: Take the Home Bank case.
By Mr. Spencer:
ne We will take the Home Bank. It had about $2,000,000 out in notes?—
A. Yes.
Q. It had paid into the note circulation redemption fund about $100,000,
and after the Home Bank went smash, all the money they could call on from
that fund was the amount paid in, plus possibly interest—A. Well, in the first
place, the liquidators have to realize on their quick assets at once to meet the
notes. The bank would surely have some quick assets. They would take up
as far as the quick assets of the bank would allow before they came on the
circulation fund. In other words, the assets take care of the note circulation
as far as they can and then the circulation redemption fund functions.
Q. Otherwise, if you follow the Bank Act closely, you will find that they
are allowed to call on the note circulation redemption fund to the extent of the
money they have paid in; then the notes are the first claim on the assets of the
bank?—A. Yes.
Q. Then, after all these assets have been swept away, if there are still notes
outstanding, they have the opportunity of going and getting these notes by
calling on the balance in the note redemption fund?—A. The other banks will
come to the rescue.
Q. Therefore, the balance of those private notes have a claim on the deposit-
ors’ accounts prior to the depositors themselves.
The CuairMAN: What do you mean by private notes?
Mr. Spencer: The banks’ private notes.
Witness: They have the same amount as the assets of the bank.
By Mr. Spencer:
Q. I will take you over it again.
Some Hon. Memeers: No, no.
Witness: Mr. Spencer, I do not think you grasp
Mr. McMaster: Will you forgive me, Mr. Spencer, if I offer a suggestion?
Suppose you ask the question, please Mr. Saunders tell us how bank notes are
protected upon the insolvency of a bank, and let him tell us from which type
of reserve the obligation is first met.
By Mr. Spencer:
Q. I would rather put it in another way. The notes are, I understand, the
first lien on the assets of a bank?—-A. Yes, the notes outstanding are the first
lien on the assets of a bank.
Q. Consequently, Federal Government deposits or bills under the Finance
Act are secondary?—A. Yes.
[Mr. J. C. Saunders.]
1—37
380 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. And Provincial deposits, are, I understand, third? Is it a fact that a
bank, like the Home Bank that has mortgaged all its buildings to a certain
private corporation, that corporation has the fourth lien on the assets of a bank?
—A. After any claims that the provinces have on a bank that would be the next
or the fourth lien, if they are approved.
Q. And after that the depositors come in?—A. No, the depositors come in
with the fourth.
Q. Where do the depositors come in?—A. After the provincial govern-
ments.
Q. Are they put on exactly the same parallel as secured creditors?—A. I
do not know about that. If a man has a mortgage on a building, he has, I sup-
pose, a better claim than one who has not a mortgage; I should think so.
Q. Otherwise, if he has a mortgage on buildings he would be what you call
a secured creditor, and depositors are what you call unsecured creditors?—A. I
cennot give an answer to that officially; that would be a matter for the liquid-
ators and the men winding up the bank who know banking business.
Q. One more question. You made the statement to Mr. Good that since
1920 you were not quite satisfied with the returns sent in by the banks and you
made one inquiry. You did not care to give the name or the date, and I am not
going to ask you for them?—A. I said I was not quite satisfied with the bank.
Q. That one inquiry, I take it, was not well founded; I think you said so?
—A. Yes.
Q. What about the cases of the Merchants Bank, the Home Bank, or the
Banque Nationale? Did their balance sheets not show that there was some-
thing wrong?—A. No.
Q. Otherwise, all you had to go by was simply the figures sent to you?
You had no means of telling that there was something risky in those banks,
that there was a liability of the public suffering loss?7—A. No, mind you, these
were all under the old Act. I think the present Act has been improved very much
last session. It gives us the opportunity to really grip the situation of a bank
better than under the old law.
Q. Previous to last year, all those banks might have been carrying on busi-
ness in a very haphazard way, and yet as they sent in their balance sheets they
would look all right to you and you had no way of checking them up?—A. No,
I had no way of checking up a bank. The Act provides that certain declara-
tions should be made and we could not go behind that unless we knew.
Q. You were not able to find anything wrong with those banks in the
statements they gave you?—A. No.
Q. Although the statements were wrong?—A. The statements seemed ail
right.
By Mr. Irvine:
Q. I just want to clear up one point about which I was not very sure. Mr.
Saunders, do you look upon it as a fact that the Home Bank had a larger circu-
lation of notes than its unimpaired capital warranted?—A. In view of the state-
ment that has been made here that the capital was impaired, it must have; if
its capital was badly impaired or wiped out, it certainly had..
Q. That is equivalent to saying that its circulation was illegal?—A. Surely.
Q. And that was the case in 1916, according to the report of the judge?—
A. Did the judge say that the capital was impaired in 1916?
Mr. McMaster: The judge says on page xxxix of his report that in 1916,
“The total paid-up capital and reserve of the bank has been lost.”
Wirness: Then the notes in circulation were illegal.
{Mr. J. C. Saunders.]
BANKING AND COMMERCE 381
APPENDIX No. 1
By Mr. Irvine:
Q. I understood you to say—you will correct me if I am wrong—that the
circulation would not affect the relation of the assets of that bank to its liabili-
ties?—A. To its liabilities, no.
Q. It would not affect it?—A. No.
Q. But if the circulation of the bank had been called in, it would have
forced the winding up of the institution, would it not?—A. Perhaps you are
missing this point, if the circulation had been called in, it would have had to be
done at the expense of the assets.
Q. Never mind the assets; just answer my question. If the circulation of
the bank had been called in, would that have involved the winding up of the
institution? I imagine you could answer that yes or no?—A. Supposing the
banks did not call in their circulation, and did not want any circulation, and
yet their capital was all right——
Q. Let us come to the Home Bank; supposing that the Home Bank’s circu-
lation had been called in by some authority, or by the bank itself in 1916, would
or would not that have implied the winding up of the institution?—A. Natur-
ally, I think the institution would have to be wound up, yes.
Q. If the institution had been wound up by calling in its circulation in 1916,
are you in agreement with the finding of the judge that the depositors would not
have lost anything?—A. I do not know; he had the evidence, and he has made
that finding.
Q. You will not quarrel with the evidence?—A. I must take that for
granted. The difference is, I do not agree that the circulation had anything to
do with it.
Q. I agree that the circulation has nothing to do with the assets and liabili-
ties of a bank; you have said that. I am not interested in that question at all.
The point is, if the circulation had been called in the bank would have been
wound up?—A. Yes.
Q. If the bank had been wound up in 1916, there would not have been the
same loss; as the judge says, no loss at all to the depositors?7—A. I accept that,
coming from the judge.
Q. Had you any power to call in or cause to call in the circulation of the
Home Bank?—A. No, we did not know.
Q. If you had had information, had you any power to act?—A. Well, the
power we have would be immediately to send in our auditor under section 56
(a), and if we found it in that state, we would have applied to the Bankers’
Association to appoint a curator and put him in the bank, as was done in the
Home Bank, because Mr. Barker was put in by the association.
Q. What excuse have you to offer for the department that the institution
was not wound up in 1916?—-A. There was no evidence before the department
that anything was wrong.
Q. Therefore, despite the profound faith which you have expressed in the
bankers, it is possible for them to have a larger circulation than their unim-
paired capital would permit, without your knowing anything about it?—A. It is
ossible, because it has happened, but it should not happen. It would be only
Pagicke that would do it.
Q. We all know it should not happen, but it may be happening right now?
—A. I do not think so. ;
Mr. Irvine: Thinking does not make it different, you see. It has been
done.
[Mr. J. C. Saunders.]
1— 377
382 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. W. F. Maclean:
Q. We had under examination here an ex-Comptroller of the Treasury of
the United States, and also an acting bank examiner in the United States. Did
you read their evidence?—A. I heard Mr. Williams’ evidence.
Q. Did you hear them say that if, as a bank examiner, he found there had
been an illegal issue of currency, or that the bank could not meet its obligations,
he would give them so many days to make good their condition as a bank, or
else he would order them to close their doors. Do you think it would be a
good action in the interests of the public if we had an officer of that kind in this
country?—-A. We have that power yet, Mr. Maclean, have we not?
Q. We did not exercise it in the Home Bank case?—A. We did not know.
Q. They have an officer in Washington and if he made an investigation and
found things wrong and unless they were able to make good the assets of the
bank, he would close their doors forthwith?—A. Yes.
Q. You heard that evidence?—A. Yes.
Q. If we had such an officer today in this country—
An Hon. Memper: We are going to get it.
Mr. Macuiran: Yes, and I want to give the Minister and our friend here
credit for it. The point is there was an officer in the employ of the Government
of the United States connection with the Treasury to take this instantaneous
action when a bank was found to have exceeded its powers, or to have lost its
assets, of making good those assets or the bank would be closed forthwith.
Hon. Mr. Ross: Have they always had that option?
Mr. W. F. Mactean: They have it now, and my friend is going to appoint
an inspector. He said that we did not need to follow foreign organizations, and
he is being forced to follow them.
The CuarrMANn: Order.
Mr. W. F. Maciran: The Minister asked me a question. Call the Minister
to order please.
The CHarrMAN: Would you kindly go on Mr. Maclean?
Mr. W. F. Macigan: I am through with my examination.
By Mr. Healy:
Q. You say that the Department had no knowledge of the condition of the
Home Bank in 1916?—A. No.
Q. Is the Minister of Finance part of the Department?—A. He is the head
of the Department, but he has his own department by himself. As I told you
this morning, any knowledge he may have does not necessarily come to me.
Q. I have your answer that he is part of the Department?—A. He is a very
important part of it.
By Mr. Good:
Q. Mr. Saunders states, he gives it as his opinion, that if the circulation of
bank notes had been called in, the bank would necessarily have been forced to
wind up. J want to ask him whether or not it would be possible or likely for
a bank to get along with Dominion notes if all its loan notes were replaced by
Dominion notes?—A. The reason that a bank would have to close up if it
called in its circulation is, we take for granted that it has to be called to comply
with the Act because it has not any paid-up capital to stand behind it.
Q. It would be only a sympton of insolvency ?—A. Yes.
By Mr. Ward:
Q. I think the witness said a few minutes ago that amendments that were
added to the Bank Act last year would save the banks from themselves, so to
[Mr. J. C. Saunders.)
BANKING AND COMMERCE 383
APPENDIX No. 1
speak, and protect the depositors. I would like him to define that, and tell us
in how far did the amendments to the Bank Act protect the banks from them-
selves and protect the depositors?—A. You mean the merits of the present Act
over the last Act.
Q. The amendments of last -year?—A. I have the statement here but it
would be a little lengthy if the Committee would like me to read it.
Q. Tell us briefly—A. Well, there is the shareholders’ audit which was
amended and added to, as you all know, last year. That would be one merit of
the present Bank Act over the other. Next to that I would put the returns.
By Mr. Spencer:
__ Q. Did not they always have a shareholders’ audit?—A. It is altogether
different in the present Act to what it was under the old Act. It was added to
and enlarged, or restricted more; in fact, we have them pretty well choked to
death by it.
By Mr. Ward:
Q. Is this new audit not subject to some amendment? What is the differ-
ence, so far as the public is concerned. How does it protect the public as against
the old Act?—A. If you want to go into that question, it may be necessary to
read what I have here, but it will take some time. If you want me to read the
merits of the one over the other, I am willing to read them.
Q. I should have thought that the witness would be able to give us in a
very few words how this new audit protects the public?—A. In the first place,
under the old Act there needed to be only one auditor of a bank, and that
auditor need not have been an experienced man, or even an accountant. In
the Home Bank, they had a man who was neither an accountant nor, I should
say, an experienced man. No experienced man would have allowed a bank to
get into the condition it did. That could not happen under the present Act
with two skilled accountants approved of by the Minister of Finance. It could
only be done by their acting in collusion. They could not go through a bank
like the Home Bank and not see what was wrong. Then according to the present
Act they would have to make their report to the directors and to the general
manager and make them liable to a knowledge of the condition of the bank.
These two auditors are independent, one of the other. They must not be mem-
bers of the same firm, and they alternate every year one goes out. That is a
great addition to supervising the shareholders’ audit compared with the previous
Act under which they could elect any one.
By Mr. W. F. Maclean:
Q. But the inspector-general would be still better?—A. We hope so.
Witness retired.
The Committee adjourned.
CoMMITTEE Room 429,
House or Commons,
Turspay, June 17; *1994
The Select Standing Committee on Banking and Commerce met at 11 o’clock
a.m., Mr. Vien the Chairman, presiding.
The Cuatrman: When reading to the House yesterday the correspond-
ence exchanged between the Clerk of the Committee and Mr. Weldon and Mr.
Lee, I said é
[Mr. J. C. Saunders.]
384 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
“The House will note that Mr. Lee does not deny having made
the declaration to the meeting, but denies only having made it to the
press. As the Citizen, the Toronto Globe and several other newspapers
contained the information in identical language I think that we can
fairly assume that the declaration was made to the meeting of depositors.
I am glad that the interpellation of my hon. friend gives me an oppor-
tunity of correcting the wrong impression given to the public. I do not
believe that Mr. Lee intended wilfully to mislead the public; but the
least that can be said, if he did make such a declaration, is that he
should have taken the trouble of inquiring from the secretary of the
executive committee as to the exact facts before making a statement
which I consider unjust towards parliament and the committee.”
Gentlemen, I may say that I had the pleasure of meeting Mr. Lee and
Mr. Weldon and some other gentlemen who accompanied them this morning,
and Mr. Lee told me that there was no such meeting and no such declaration
made either to the press or to the Committee of the Home Bank depositors.
Mr. Lee has requested me to give him an opportunity this morning to make a
statement to the Committee in that respect. Mr. Lee is present, and I think
it will be the pleasure of the committee to hear the statement that he has to
make in respect to that matter. May I point out that we do not want to.
make more fuss about it than is necessary; but the question of the Home Bank
depositors has a nation-wide aspect, and we do not want the public at large in
Canada to believe that Parliament or this Committee is derelict in its duty
of duly considering their interests, and the problem which is before Parliament
to-day. The correspondence will show, I think, that the Committee has endea-
voured to give the relief committee of the Home Bank depositors all possible
consideration. I am glad to state to the Committee that Mr. Lee has declared
there was no such meeting of depositors and that no such declaration was made.
Mr. Lee: I came down here from Toronto to straighten this matter out.
As I wired the Chairman, no such interview was given to the press and nothing
that could be construed into such a statement. I believe there were some local
meetings, but I say that there was no meeting of the National Committee held
at which anything of this nature was said. As a matter of fact, I have been in
communication with Mr. Mitchell, the former Chairman, and we knew all
along that this Committee was going to hear us. I think it was only my duty
to your Committee to come here from Toronto and make this explanation. Far
be it from us to make any such statement when we know the facts to be other-
wise.
The CuHatrmMan: I think the question is closed to the satisfaction of all
concerned. Mr. Ross, Secretary of the Bankers’ Association wishes to make
an explanation in regard to an answer which he gave to a question when he was
before the Committee.
H. T. Ross recalled.
Witness: On page 334 of the proceedings a question was asked me by
Mr. Healy.
‘“Q. Had $2,000,000 of Dominion notes been in circulation by the
Home Bank instead of $2,000,000 of the Home Bank notes, there would
not have been this loss?”
and I am credited with the answer—
A. “No, it would not have been lost.”
{Mr. Henry T. Ross.]
BANKING AND COMMERCE 385
APPENDIX No, 1
That answer is not a correct answer; it was given without consideration.
Nothing was lost by the issue of notes either Home Bank notes or Dominion
bank notes, and there would have been no difference to the depositors whether
the Home Bank had issued $2,000,000 of Dominion notes or $2,000,000 of its
own notes, for this reason: Had the bank issued $2,000,000 of Dominion notes
before its failure, it would have had to take $2,000,000 out of its assets to buy
the Dominion notes and get them. The only difference is that if it had issued
$2,000,000 of Dominion notes the money would have been taken out of the assets
before the failure. Now, it has issued $2,000,000 of its own notes and the
money has to be taken out after the failure. There is no difference. One
further remark, there is a little advantage to the depositors in the fact that its
own notes were issued because the bank has had the use of the money in the
interim; it has not had to pay the money out so early.
By Mr. W. F. Maclean:
Q. If there was an issue of Dominion notes and no provision was made to
help the bank to get some advantage out of a note issue; if you could substi-
tute Dominion notes for the right to issue the bank’s own notes, the Dominion
notes would be satisfactory to the public?—A. It would make this difference,
as explained by Mr. Neill in his testimony; if Dominion notes were issued
and became the sole circulating medium, the bank would have to take it out of
its assets to buy the Dominion notes, and it would have that much less liquid
capital with which to do business.
Q. The right to issue notes could be given to get the use of Dominion
notes instead of the bank’s own notes under the same conditions?—A. I do not
think the Committee would favour giving notes to the banks, an obligation
of the Government.
By Mr. Irvine:
Q. It would make no difference to depositors whether the notes were issued
by the Dominion or by the banks?—A. Not a bit.
By Mr. Good:
Q. I would like to ask the witness, does he not recall that when Mr. Neill
was under examination he distinctly stated the alternative proposition that a
certain limited amount of Dominion notes be given to the banks free of charge
and that above that they would have to pay?—A. I do not remember that.
Mr. Goon: I do distinctly.
Witness: I have no recollection.
Witness retired.
The CHAIRMAN: We decided, I understand, at the last sitting that we would
hear an officer of the Post Office Department in respect to the operation of the
Post Office Savings Bank.
AustTIN Biuu called.
By the Chairman:
Q. Will you give your qualifications? You are an official of the Postmaster
General’s Department?—A. Yes.
Q. What is your office2—A. I am head of the revenue division.
Q. Of the Post Office Department?—A. Yes.
Q. Do you know about the organization and operation of the Post Office
Savings Banks?—A. Yes, I have to deal with them.
[Mr. Henry T. Ross.]
386 SELECT STANDING COMMITTEL
14-15 GEORGE V, A. 1924
Q. Are they under your direction?—A. No.
Q. Who is the director?—A. Mr. Fairweather is the superintendent under
the financial superintendent, Mr. Glover.
Q. Will you please tell the Committee what the organization is, and give
a general statement as to the operation of the Post Office Savings Banks?—A.
Well, I do not know how far afield you wish me to go in answering that ques-
tion. I did not come with any address prepared or with any notes. I was asked
to come and answer any questions that the Committee might wish to ake. <d.
may say that the Savings Bank Branch Department has to confine itself to the
operations of the Post Office for the receiving of savings.
By Mr. W. F. Maclean:
Q. Haw many are there?—A. Thirteen hundred, between thirteen hundred
and fourteen hundred.
Q. In all the provinces?—A. In all the provinces.
By Mr. Sales:
Q. How many post offices do you have altogether?—A. I have not the
exact figures, but I think 13,000, of which about 5,500 are money order offices.
At the end of March, 1923, which is the report I have before me, there were
12,228 post offices in operation at that time.
By Mr. W. F. Maclean:
Q. And how many money order offices?—A. 5,500.
Q. Money order transactions occur at 5,500?—A. They sell money orders
and take savings bank deposits at between 1,300 and 1,400.
By Mr. Sales:
Q. Can you explain the limitation to that number?—A. Of the savings
banks?
Q. That there are only one thousand odd savings banks as against 5,500
offices that do a money order business?—A. There may be two reasons. One
is that they only do a savings business where it is needed. They may have
ample banking facilities and there may be no need for a savings bank. That
may be one reason. Another reason may be that the office might not be big
enough, or there is no call for it because it is in a very small place where there
might not be a call for money or for a savings business in that place.
By Mr. W. F. Maclean:
Q. How do you get a savings bank at a post office?—A. They would peti-
tion for it or make representations through a member or perhaps one member
of the community might draw the attention of the inspector of that community
to the need for it and he would make a report to the Department. The Depar-
ment then decides, after looking over the business of the office and other things,
whether a savings bank should be established at that post office.
Q. Does the postmaster get any remuneration for that business?—A. He
gets one-quarter of one per cent, plus one-tenth of that on the deposits.
By Mr. Sales:
Q. Is the Post Office Department making any effort to push this business,
or must it arise from the people themselves?—A. I would not say that. If an
inspector finds a post office where there was a need for it, he would report to
the Department that fact.
By Mr. W. F. Maclean:
Q. Is it the policy of the department to promote the public use of those
post office savings banks?—A. If they see that a locality wishes to use it, they
[Mr. Austin Bill.]
BANKING AND COMMERCE 387
APPENDIX No. 1
are willing to put it in, but I would not say that they are anxious to go out
and compete with anybody else. I would not like to say that.
By Mr. Sales:
Q. What steps would they take to bring the savings banks to the attention
of the public? Is there any advertising?—A. Yes, there has been advertising.
There have been posters put in the post offices giving the information, and
readers in the newspapers pointing out the advantages of using the post office
savings banks.
By the Chairman:
Q. When was the system introduced?—A. I think in 1868, just after Con-
federation.
Q. 1868?—A. Yes, I think that was the year.
Q. Can you quote the statute?—A. No, not offhand. I do not think I have
it in any of the papers I have here. I see Mr. Ross here; perhaps he might
remember the statute.
Q. Was there any considerable change in the legislation respecting post
office savings banks?—A. No, I do not remember any change except a change
in the rate of interest at one time, a long time ago.
@. The fundamental legislation is the same?—A. Yes, the objects were the
same.
By Mr. W. F. Maclean:
Q. How do you compare with the British Post Office Savings Bank, or the
American Post Office Savings Bank?—A. In which way?
Q. Are you as much up to date as they are?—A. We claim to be. Of
course, the British and the American Savings Banks—in the American banks
the rate of interest is not as high as I understand it.
Q. What is yours?—A. Ours is three. I am not giving that as information,
but just as an impression.
By Mr. Benoit:
~ Q. What is the amount deposited in the Canadian Post Office savings
banks?—A. About $25,000,000, a little over $25,000,000.
Q. Was there an increase this last year?—-A. Yes, there was an increase
in the last year.
Q. An increase of how much?—A. It increased a little short of $3,000,000
during the year.
Q. Owing to the Home Bank?—A. Well——
By Mr. W. F. Maclean:
Q. What is the rate in the British Post Office Savings Bank?—A. I have
not that here.
Q. What is the limit of your deposits—the smallest and the largest?—
A. You can put in one dollar and you can deposit up to $5,000.
By Mr. Spencer:
Q. How much can you put in in one year?—A. Within one year, I think
it is $2,000. As I say, I am not charged with the operation of the savings
banks; I am charged with the accounting. But I can correct these figures. I
am just saying $2,000 from memory.
By Mr. W. F. Maclean:
Q. How does a man withdraw his money? What does he have to go
through?—A. He makes an application to the local post office.
{Mr. Austin Bill.]
388 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. He signs something?—A. He signs an application, yes, and sends in his
pass-book to the head office for the withdrawal of over $25. Under $25, under
an arrangement made last year, he can make a withdrawal at the local post
office and have it checked up there. Above that amount, the pass-book has to
be sent to Ottawa, where the account is verified, and the cheque is sent to the
postmaster, who delivers it to the depositor.
Q. It takes how long to do that in Ontario?—A. If it is one day’s mail, it
would take one day to come up and one day to go back. It would be dealt with
here immediately.
Q. It is a two days’ proposition anyway?—A. Yes.
Q. And in British Columbia it would be a ten-day or twelve-day proposi-
tion?—A. Yes.
By Mr. Millar:
Q. Are these post office savings banks ever withdrawn because of competi-
tion with the chartered banks?—A. I know of no withdrawals of that kind.
They might be withdrawn because the depositors may have taken out their
money and put it in some other place.
By Mr. Garlarbl:
Q. Is it regarded by the department as entering into competition with the
chartered banks if you establish a post office savings bank in a small town?—
A. No, it is not regarded as competition at all.
Q. That does not enter into the policy of the department?—A. No, no, they
would not regard it as entering into competition to put in a savings bank where
there was a chartered bank.
Q. What are the considerations that govern the establishment of post office
savings branches?—A. Generally speaking, the need of the community for it
shown in different ways. That is, it may be shown by the fact that it is asked
for. It may be shown by the fact that the inspector of the Department sees
that it is needed.
Q. In the event of a district deciding through, we will say, its municipal rep-
resentatives or a town council or some other representative body of citizens that
it should have a post office savings bank established in that district, would the
post office authorities accede to that request?—A. They would most likely
accede to it.
Q. If they did not, what consideration would they weigh? How does your
Department decide whether to establish a post office savings branch or not?—A.
Well, the first thing you would look at would be the size of the community
asking for it. The second would be—and that would be wrapped up with the
first proposition—the ability of the present postmaster to do banking business.
He might not have been chosen because of his ability to do banking business.
I think these would be about the only thing that the Department would have
to decide, apart from the representations made by petitioners or by the inspector.
Q. Have any representations ever been made to your Department by the
chartered banks or any protest against competition, or suggesting withdrawal?—
A. No, I know of none. If they have been made, they have been made perhaps
to the Minister who has not told the officials of the Department. I have known
of none where the banks have suggested that we withdraw.
Q. Have you had any protests or suggestions?—A. No, I know of no
protests.
Q. No protests at all? —A. I know of none.
[Mr. Austin Bill.]
BANKING AND COMMERCE 389
APPENDIX No. 1
By Mr. Sales:
Q. Would you see that correspondence in your capacity as accountant?
Would that come before you at all?—A. It might not come before me, but a good
deal of it would. That is, it would affect the accounts of the office, and probably
be on the general file.
Mr. Sates: The witness said he was not responsible for the operation of the
savings branches, that he is the accountant.
By Mr. Garland:
Q. Has the Department closed any post office savings banks in the last
year?—A. They are continually being closed down and opened and re-opened.
Q. What is the most common ground on which you close your branches?—
A. Common ground?
Q. Yes——A. One of the grounds would be perhaps a change of postmaster
and that they felt that perhaps that would be better kept closed until we found
out how the new postmaster was acting. Of course, that would be in a small
place, not in a large place. In that case there is no doubt that the postmaster
is not always so closely in touch personally with the office in a large place. I
am speaking of the small places.
Q. In a case of that kind would not the closing up cause a good deal -
dissatisfaction among those who had money deposited in the local savings
branch? You suggest that it is decided sometimes on a change of the post-
master?—A. Possibly, yes.
Q. Is that not likely to make it rather inconvenient to the depositors in that
place?—A. You must remember that this would take place in a town of very
small size. In the larger places the order of procedure is more set. The post-
master has competent assistants to carry on for him.
By Mr. Irvine:
Q. Would you suggest that in the appointment of postmasters the author-
ities do not take into consideration his possible capacity as a banker?—A. That
would be in an appointment of a postmaster to an office that was not a savings
bank office. A banker—you must use the term very guardedly, because he is
not discounting notes or anything like that.
By Mr. Garland:
Ke "a You mentioned that $25,000,000. was the total amount now on deposit?
—A. Yes.
Q. Do you not think that that is a very small amount for between 1,300 and
1,400 post office savings banks in Canada?—A. It is.
Q. Do you not think that a policy could be established to extend the
influence of the post office savings bank so that we would have greater deposits
than that?—A. Well, if it were desired, you could do lots of things like that.
Q. Do you think it is desirable?—A. That is a point that would take up
a whole day’s discussion. :
Q. I am simply asking you for your opinion as an expert in the Depart-
ment? Do you think it is desirable that the post office savings bank business
should be extended in this country ?—A. You are asking my opinion, personally.
I think that the Post Office has no reason to go into competition with any
existing means of giving service, but to supplement any service that is given
at present.
Q. You have just told me that there has never been any protest on the
part of any representative financial institution regarding possible competi-
tion?—A. Regarding possible competition, yes, so far as I know.
[Mr. Austin Bill.]
390 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. If there has been no protest, why do you make that suggestion, that
it is not the policy to go into competition, if no protest has been registered ?—
A. I am just reading into the thing what has been the policy since the start.
It was started as a thrift scheme, you know.
Q. It is the policy of the Department not to compete with any other insti-
tution?—A. I would say that that was the foundation of the whole savings
bank scheme from the start.
Q And you do not think it desirable to extend post office savings bank
business?—A. I would not say that because we are ready to extend it when
we see the need for it and it is asked for.
Q. Supposing that a town in Western Canada had a bank at the present
time performing the services that are usually performed; supposing that in that
district a demand arose for the establishment of a post office savings bank where
the people wanted to put their money in a place where their deposit would be
guaranteed; is it probable that you would establish it there?—A. Oh, yes.
By Mr. W. F. Maclean:
Q. You regard this as a public service, this post office savings bank?—
Ai Mes.
Q. And you as an official of the Department have no objection to extending
that service?-—-A. Not at all.
Q. What objection have you to marking cheques if it was to increase your
usefulness to the public so that they could get their money right away and
pay their debts, instead of having to send to Ottawa?—A. Do you mean that
the depositor should draw a cheque himself on the savings bank: and have it
marked by some official of the Department?
Q. At the office?—A. By the postmaster?
Q. Yes.—A. Well now, I said a few minutes ago that the idea of the post
office savings bank was a thrift scheme.
Q. It is a public service?—A. The accent is on the savings rather than
on the bank. I said also that when we choose postmasters, they are chosen
mainly to do postal business. When you come to cashing cheques and keeping
individual accounts, you are adding to the complexity of a postmaster’s duty;
it would be a big step for us to go in for keeping individual accounts
in post offices, and for a postmaster to take those cheques and mark them and
pass them out as currency among the people, for that is what they will become.
It is a step that the Post Office Department has been very slow in taking,
because it is to a certain extent a more or less risky step.
Mr. HucHes: Do you mean, Mr. Maclean, that the cheques would be
cashed at the post office bank?
Mr. W. F. Macuean: I want to facilitate the getting of the money. I
would want him to get his cheque marked and get his money and be able to
pay his debts with it.
By Mr. W. F. Maclean:
Q. Is the Postmaster General in town?—A. I have not seen him.
Mr. Mactean: I understand he is in town and I would like to have him
here. I am told that he has a policy as to extending these banks, and I would
move that we call the Postmaster General here and have him state his policy.
I think he wants to unfold it.
By Mr. Hanson:
Q. This would involve the keeping of a set of books in the post offices?—
A. Individual accounts.
[Mr. Austin Bill.]
BANKING AND COMMERCE 391
APPENDIX No. 1
Q. And in a town of considerable importance that would be a very large
undertaking, would it not?—A. Yes.
if Lo And would involve a great deal of expense upon the present system ?—
. Yes.
Q. And a great deal of responsibility on the post office officials as well
as on the postmasters?—A. And a great deal of suspicion, because everybody
is suspicious as to what the postmaster knows about him. They do not mind
the banks knowing.
By Mr. McKay:
Q. Do any savings banks exist where there are no post offices?—A. No,
none of ours.
By Mr. Hughes:
Q. About the extension of the post office savings system to the marking of
cheques, is that not rather a matter of policy for the Government than for an
official to give?--A. Well, I was not giving any opinion. If I did that—
By Mr. Spencer:
Q. With regard to the answer you gave to Mr. Hanson you said that if
you enlarged the work of the post office savings branches it would make more
work?—A. Yes.
Q. You would have to have extra book-keeping, but some man could do
it?—A. No, some men would not do it.
Q. If it involved more than one man’s work, you could have another man?
—A. There would be the same amount of work to be done. We take it that
it is so, although it is distributed.
Q I take it that the Government, through taking money from the post
office savings banks, can make a profit on the transaction?—A That is another
question, about the profit.
Q. You do not think they make a profit?—A. They borrow the money for
three per cent, and you can figure it out.
Q. And they pay five and a quarter?—A. Three per cent, plus expenses.
Q. You think that they should make a profit on it?—A. They should, yes.
Q. Therefore, the more business they do through the post office savings,
the more profit they could make; and therefore, so far as extra service is con-
cerned, it would not cut any figure at all?—A. You mean the expense of extra
service? I was not thinking of that at all.
Q. The more business the post office savings banks do the better for the
Government, and the more money the Government would make in profits. You
have admitted to me that they make a profit, have you not?—A. I gave you
some figures and you drew the inference that they had a profit.
Q. Does the Government make any profit from the deposits received
through the post office savings banks?—A. I suppose that any one would say
that if any person borrowed at three per cent, and if the expenses of borrowing
were not high, he would make a profit, if they had not to borrow the money at
a greater rate.
Q. If the Government makes a profit on the small amount it collects, it
would have a chance of making more profit on a larger amount. Is that a fact?
—A. That seems good arithmetic.
Q. You made the statement that an individual is allowed to place in the
post office savings bank an amount equal to $1,500 a year?—A. $2,000. I said
I did not have the figures, but we will take it at that.
Q. It used to be $1,500; it may have been extended. Why is this limit
placed on the amount?—A. I suppose we have to go back to the very idea that
(Mr. Austin Bill.]
392 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
the savings bank was established to encourage thrift and to give a place as a
substitute for the old stocking, a place to put a man’s savings in and not to
be withdrawn rapidly, and the idea was, I suppose, that they did not want to
go into carrying big accounts but that it would just be for the small depositors,
depositors with small amounts. That was the idea of the thing, a_ thrift
scheme.
Q. Considering that the Government is continually wanting money, is
there any reason why there should be a limit placed on the amount?—A. That
is a question that really takes in policy. ee
Q. You would give the same answer, I suppose, in regard to the limit of
$5,000 to any one individual depositor?—A Yes.
Q. Do you know what the policy of the post office department is in that
respect?—A. I do not know that it has ever been proclaimed.
Q. You would not like to give a personal opinion as to whether it would be
a good or a bad thing?—A. I do not think it would be worth anything if I did.
Mr. Hanson: Is it fair to the witness to ask these questions?
Mr. Spencer: He has the opportunity of declining to answer.
By Mr. Spencer:
Q. What percentage of interest do the post office savings banks pay ?—A.
Three.
Q. Did they ever pay any more?—A. Three and a half at one time, a good
many years ago.
Q. Did they pay prior to 1897 four per cent?—A No, three and a half, I
think, before 1897. j
Q. You are not quite sure of that?—A. No, I do not have the figures, but
that is my recollection of it, three and a half.
Q. I think it was four. Do you know why it was reduced to three per
cent?—-A. Money was getting cheaper at the time it was reduced. Of course
it was before my day, but I am old enough to remember that money got con-
siderably cheaper and more loans were floated.
Q. You do not know that any influence was brought to bear so that the
post office savings banks would not interfere with private institutions?—A. I
do not think there is any record of that.
Q. What is the Post Office Department doing with the money it collects?—
A. It is paid over to the Finance Department, and it goes into the Consolidated
Revenue Account, the same as any other money that comes in.
Q. It is used for Government purposes?—A. Yes.
Q. That strengthens my argument; the more money that the Government
can collect from the post office savings, the more money it could make, because
I understand from the Minister of Finance that they are paying five and a
quarter on Treasury bills. Do they place this money in the various banks for
the time being?—-A. No, it goes into the Finance Department. A lot of it goes
into the general fund or wherever that money goes that comes in. It is not
ear-marked after it reaches the Department.
Q. Is it not deposited in the Government’s name in the various banks?—-A.
No, there is nothing to distinguish it from any other dollars that come in.
By Mr. Hanson:
Q. It goes into Consolidated Revenue?—A. Consolidated Revenue.
By Mr. W. F. Maclean:
Q. And then into some bank?—A. There is no savings bank accounts in
any bank.
(Mr. Austin Bill.]
BANKING AND COMMERCE 393
APPENDIX No. 1
By the Chairman:
Q. The balance of the Consolidated fund is always in a bank?—A. Yes.
By Mr. Spencer:
Q. It is not loaned to the banks?—A. It is not loaned to the banks.
Q. The Government uses it for its own purpose. You mentioned, I think,
to Mr. Garland that if a locality wanted a post office savings branch at a post
office at any point, even if a bank was in that locality, they would have no
difficulty in getting it?—A. There would be no difficulty if it was needed; the
existence of the other bank would not decide it.
Q. I may say that I know of a case where a request was made for a post
office savings branch. The postmaster was perfectly willing—he was a very
able man indeed—but the answer came back.that there was no opening there
because the bank at that particular place had decided not to go. I would like
to know whether you know anything about that?—-A. Can you give me the
name of the office? I would like to take a note of it.
Mr. Spencer: Egerton, Alberta.
By Mr. Spencer:
Q. I was also told that one of the reasons was that it was not the policy of
the Government to encourage the opening of saving banks at the present time?
You do not know that?—A. I did not know that that was the policy of the
Government. ‘This is a special case.
By Mr. W. F. Maclean:
Q. You know that there are other Government savings banks besides the
post office savings banks?—-A. There are a few.
Q. Where are they?—A. Dominion Government? Mainly in the Maritime
provinces.
Q. Do you keep their accounts?—A. No, they are kept by the Finance
Department.
Q. You do not know that the American Government is now paying, I think,
four and a half per cent?—A. On savings?
Q. On deposits?—A. No.
Q. Under the National Reserve Bank System.
By Mr. Millar:
Q. In all our papers we find the chartered banks advertising. In con-
nection with the post office savings banks, what does the Government do to bring
to the attention of the people the facilities that are available? I am under the
impression that there are a number who do not know even that these facilities
are available to them; I doubt whether they know that there are such savings
banks in their locality. What does the Government do to bring these facilities
to the attention of those people?—A. They put posters in the post offices and
readers in the papers, and in their postal bulletins. These go out and are some-
times received by the public, and sometimes they are put up in the post offices.
There are notices about the post office savings banks and their advantages. The
weekly bulletin of the Post Office Department is hung up in all post offices, and
it goes to a number of people.
By Mr. Hughes:
Q. You have been asked questions along the lines of further development
and extension of the post office savings system. Providing that the Government
decided to extend the system and open more post office savings banks, to enlarge
the facilities and advertise for deposits, and in that way obtain a considerable
[Mr. Austin Bill.]
394 : SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
portion of the liquid capital of the country, have you ever thought of what the
effect would be upon the business and industrial communities?—A. It has been—
Q. Have you given any thought to the effect of such a policy?—A. I have
thought of it.
Q. And what is your conclusion?—A. My personal conclusion?
Q. Official or personal?—A. Officially, I have never been called upon to give
an answer. ;
Q. Personal then?—A. Personally, I should think that if the Government
got hold of the money in trade that goes into the banks, I think it would be a
little inconvenient to the country. : he is
Q. The liquid capital that is now used in the commercial and industrial life
of the nation, if that was taken by the Government for Government purposes,
what in your opinion would be the effect on the country?—A. That is a pretty
big question.
Q. I know it is a big question?—A. You can imagine what would be the
effect at any time if you take a water supply from its ordinary channels and
put it into a new channel; the new channel may be the best channel for it to run
in, but it would be inconvenient—
Q. The new channel would be inconvenient?—A. It might be the best
channel to run in, but it would be inconvenient to take it out of the old channel.
Q. Do you say that it would be the best channel by absorbing it?—-A. Your
question was what would be the effect?
Q. On the industrial and commercial life of the country?
Mr. W. F. Macuean: And on the banks.
By Mr. Hughes:
Q. I will include that, on the banks and on the industrial and commercial
life of the country.
By Mr. Sales:
Q. There would not be any less money in the world, would there?—A. I do
not suppose there would be.
By Mr. Coote:
Q. Are you aware that one of the chief aims of this Committee is to safe-
guard the interests of depositors generally ?—-A. I suppose so.
Q. You are not sure?—A. I was not told that, but I suppose that would
be the aim of any Committee of the House. :
Q. Have you ever known of any loss to any depositor in the post office
savings banks? Would it be possible for a depositor to lose his deposit in the
post office savings bank?—-A. I cannot see how he could lose it, because the
Government would be responsible for the action of its employees, and if there
is any mis-appropriation of accounts, it would be made good to him.
Q. Just a question or two with regard to the operation of the post office
savings bank. In case the depositor wished to withdraw up to $25, would you
explain to the Committee just how he gets his money?—A. He goes to the
local post office where he has deposited his money, where his pass-book shows
the stamp of his deposit; he presents that pass-book to the postmaster, and
says he wishes $25 or an amount up to that, and the postmaster, having looked
over his book and seen what the balance is to his credit pays him over the
$25. This is a mere convenience to the public recently in order to popularize
the scheme. :
Q. What does the postmaster do with the depositor’s pass-book?—A. The
postmaster would put in an entry there, a notation of the withdrawal, and he
[Mr. Austin Bill.]
BANKING AND COMMERCE 395
APPENDIX No. 1
would report the matter at once to Ottawa where the man’s account is kept,
and he would be charged with the $25 or whatever the amount is, at Ottawa.
By Mr. W. F. Maclean:
_ Q. He has to send to Ottawa?—A. This is not a withdrawal from Ottawa,
this is a local withdrawal that he is speaking of.
By Mr. Coote:
Q. How many withdrawals of this kind would he be allowed to make? Is
there any limit?—A. He would not be allowed, I think, to make more than one
aday. The idea is to limit the withdrawal to $25. If a man made a withdrawal
of $25 in the morning, and came back in the afternoon for another $25, he would
be considered by the postmaster—I do not think the case has arisen, but if it
did arise, the postmaster would say “ You are really violating the intent of this
regulation.”
Q. Is there anything in the regulation which states that he cannot withdraw
twice in a day?—A. I do not think there is, but I think that is a thing which is
left to the interpretation of the man who is administering the work.
Q. Do you see any real objection to a proposal to increase this amount
which you may withdraw at the local office?—-A. Under present conditions,
there would be because this amount of $25—the Government is willing to take
a chance up to $25 but there must always be a certain element of chance when
the withdrawal is made at a point where the account is not kept.
Q. What is the limit to the amount of a money order that may be issued
at that office?—A. One hundred dollars.
Q. Then what objection would there be to placing the limit at $100 in this
regard? Would there be any more reason for the Department taking a chance?
—A. In the case of a money order, you must remember that they get $100 and
issue an order on any post office up to another $100. That cannot be dupli-
cated in any way except by a clear case of fraud and of course we will except
that. It cannot be duplicated, and I think there is a perfect check on the trans-
action from the moment it comes in until it is paid out. There is not under the
present scheme a perfect check on withdrawals. It is a transaction upon which
the department must take a little risk.
Q. What would be the objection to increasing the amount which a man may
deposit in a post office savings bank? You understand that we are considering
measures which would tend to increase the safety of depositors. What is the
objection to increasing that amount, or why should there be any objection?—
A. There is no objection that I can see. Some one has asked that the Post-
master General appear before the Committee and whatever the objection may
be, it would be better for him to give an answer.
Q. As an employee of the department, what do you think the objection
would be?—A. None from a borrowing standpoint as long as we kept the
accounts here in Ottawa. If you kept local accounts, as has been suggested ——
By Mr. W. F. Maclean:
Q. Is there a local ledger?—A. No, there is no local ledger.
By Mr. Coote:
Q. Supposing there is no !ocal ledger, can you tell the Committee what
difficulty there woulld be in the way of operation?—A. There would be no more
difficulty in handling a $10,000 account than a $5,000 account.
[Mr. Austin Bill.]
Sais
396 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
By Mr. Carmichael:
Q. I would like to be clear on one point. The rate that is paid is three
per cent, and I understand you to say that the cost of administering was one
quarter of one per cent, plus cne-tenth?—A. That is a commission paid to
the postmaster.
Q. That one-tenth would be added to one quarter of one per cent?—A. Yes.
Q. Making 3.35?—A. That would not be the cost. That is only a commis-
sion on the deposits.
Q. What would represent the total cost over and above that?—A. We regard
one-half per cent as the cost of administration at the present time.
Q. That is, three and a half per cent represents the total cost to the Govern-
ment on the $25,000,000 of which they have the use, and the Government pays
five and a quarter per cent. In order to extend the facilities for post office
deposits, what would your opinion be in regard to paying say four per cent
for deposits? Would not that be a step towards extending the system and
bringing in money for use by the Government at a cheaper rate than they are
at present paying?—A. Of course, I think that is a question that should really
be answered by the Finance Department, because they are the borrowing
Department. We only offer facilities for depositors.
Q. I will not press that question. In regard to the point raised by Mr.
Hughes as to the effect on the business of the country by all this money going
into the hands of the Government; is it not a fact that when this money goes
into the hands of the Government it is not put in a big box and locked up?
Does it not go to build harbours and docks and so on?— It is not put in a big
chest and locked up?—A. No.
Q. It is circulated through the country just as if it went into a bank?—A.
Certainly. é
Q. The money is kept in circulation? Therefore, it would seem to me that
the best way of extending the post office savings business would be to increase
the rate say to three and a half or possibly four per cent, and then there would
be a greater supply of money placed on deposit for the use of the Government
at a cheaper rate than they are paying now?—A. I was not asked a question
regarding that.
By Mr. Garland:
Q. Continuing that same point, I would like the witness to tell us the process
followed. The post office savings bank in a town, Hast or West, takes in deposits,
thrift savings you call them, up to $2,000 for one year with a limit of $5,000.
What happens to that money taken on deposit? What does the local postmaster
do with it?—A. Well, if he has no use for it for money orders or anything over
his counter, it goes to some bank.
Q. In other words, it is again available for loaning by the bank?—A. No,
the banker sends a draft to Ottawa and we have the money transferred to the
Government account here.
Q. Do you have it transferred right away?—-A. As soon as we can get it
transferred, as soon as the draft gets here.
Q. So there is a complete transference of the people’s savings to Ottawa
from all parts of the Dominion?—A. Yes, except what is not needed for local
purposes. If there are money orders to be cashed at that place, the postmaster
would use that money.
Q. What is your regulation in that regard? What amount is kept on deposit
in the local bank?—A. There is nothing kept there except what he may see need
for to cash orders.
[Mr. Austin Bill.)
BANKING AND COMMERCE 397
APPENDIX No, 1
Q. It is left entirely to the local postmaster?—A. He is working under a
regulation.
Q. What is the regulation?—A. Twenty-five dollars is supposed to be his
reserve ordinarily; that may be increased at any office where we see need for it.
Q. When it comes to Ottawa where is the money put then?—A. We get the
draft in the Post Office Department just the same as any other draft, only it is
on a special form, and we send it to the Finance Department, and the Finance
Department transfer their money to the Bank of Montreal.
Q. Exactly. And supposing one of these banks failed, what would happen
to the deposit?—A. If one of the banks failed?
Q. Yes, any bank in which the Department of Finance has these deposits
representing the savings of the people?—A. They are not kept, the savings of
the people, on deposit as such, you know.
Q. I quite understand that, but nevertheless they are in effect the savings
of the people. You have taken them in a branch of the savings department and
transferred them by draft to Ottawa where they are transferred to the Depart-
ment of Finance and then to one of the chartered banks of the Dominion. Is
that not the process?—A. Yes.
Q. Mind you, I am not suggesting that any of these banks are going to
fail, but supposing a horrible accident happened and one of them did fail, what
would happen to that money?—A. We are speaking now, not of savings bank
money, but of any Government balance that is in the bank.
Q. That is what it becomes, exactly, a Government balance?—A. You
people know more about that than I do, but I thought there was a preferred
claim. ;
Q. You know there is one, do you not?—A. I have never studied the ques-
tion, I know from general information.
Mr. Garuanp: It is an indirect way of guaranteeing deposits.
The Cuairman: No, I think the Committee quite understands that when
the Government has deposited money in the banks they have a privileged claim
for the deposits that the Government have in the bank.
Mr. GartanpD: Which are the deposits of the people.
The CuairMan: The guarantee of the Government to the people is a guar-
antee by the Post Office Department. It is not that the Government has a
privileged claim for their balance in the bank and that that gives an additional
guarantee to depositors. The depositor in the postal savings banks has a guar-
antee from the Government on their deposits. The Government deposits that
money in the course of their banking business, and if there is a balance left to
their credit in a bank, and if that bank should fail the Government have a
privileged claim.
Mr. GaRLanpb: Exactly.
Wirness: I may say that the Government guarantee on savings banks’
deposits is ten per cent of the gold reserve. That has to be held in the Finance
Department.
By Mr. Garland:
Q. Just explain that clearly?—A. Under the Gold Reserve Act, I do not
know that I am quoting the Act rightly, they hold ten per cent. For every ten
dollars of the savings bank deposits there is one dollar held in gold in the
Finance Department.
(Mr. Austin Bill.]
398 SELECT STANDING COMMITTEE
14-15 GEORGE V, A. 1924
Q. So that when the amount on deposit increased by $3,000,000 during the
last year, you had to increase your deposit under the Gold Reserve?—A. By
$300,000.
By Mr. Good:
Q. I would like to know the procedure. When a customer of the post office
savings bank wants money to a greater amount than $25, he makes application
to the local postmaster, and the local postmaster forwards his application with
the pass-book to Ottawa?—A. Yes.
Q. In what form is the money returned?—A. In the form of a cheque.
Q. Where does the customer cash the cheque if he wishes to cash it, at a
local bank?—A. At a local bank, or the postmaster will possibly oblige him.
By Mr. Sales:
Q. At par?—A. At par, yes.
Mr. W. F. Mactran: Would the witness supply this Committee with these
blank forms? As there is no local ledger, he cannot give us a copy of that, but
I would like him to give us any printed forms in connection with the operation
of the savings banks.
The CuatrMAN: All forms that are at the disposal of depositors?
Mr. W. F. Maciean: Yes.
Witness: You want the forms used for the withdrawal of money?
Mr. W. F. Macitean: Anything; a copy of the pass-book and all the forms.
Wirness: All forms used in connection with the post office savings business?
Mr. W. F. Macuran: Yes, and all the regulations.
The CHatrMAN: You can produce these as an exhibit.
By Mr. Spencer:
Q. All money collected through the post office savings banks, except a small
amount that is held back as a safety balance, goes to the Consolidated Revenue
Fund of the Government?—A. I qualified that by saying what is needed at the
post office for the payment of money orders or for other payments.
Q. I admit that. The Consolidated Revenue Fund of the Government is
kept in the various banks. The drawn money goes back to the banks; there is
no other place to keep it, and the Government keeps its accounts in the banks.
There are two points; one is that there is only four per cent of the credit in
Canada in the shape of money. Now, the credit of those banks is not kept
separate. The banks make their loans on security and all the money that has
been collected in this small way eventually goes through the Consolidated Fund
of the Government and back into the banks. That is a fact, is it not?—A. When
you say “ back into the banks,” it is not in the bank on deposit; it is in the bank
for use.
Witness retired.
Mr. W. F. Mactean: I move that we ask the Postmaster General to appear
before the Committee.
The CuairMAN: I will let the Committee know at the next sitting whether
that is possible or not.
The Committee adjourned.
(Mr. Austin Bill.]
INDEX TO PROPOSED AMENDMENTS TO BANK ACT
Proceedings only. General index on following pages.
Sec.
10. Capital Stock—Mr. Coote, excvi.
13. Stock subscription—Mr. Coote, excv.
36. Sale of shares—Mr. Shaw, exc.
54. Profit and Loss Account—Mr. Spencer, cxevi. .
56. Inspection (adopted)—Hon. Mr. Robb, x, xi, clviii, clxiii, elxx to clxxiv.
61. Note circulation—Mr. Coote, clxviii, clxix, exev.
76. Limitation oe Deposits—Mr. Garland, excv.
76. Loans to Directors (adopted)—Mr. Garland, excii.
88. Notice of intention to give security—Mr. Spencer, clxiii, clxxxix.
113. Notice of deposits and loans—Mr. Coote, clvii, elxxxvii.
125. Transfer of shares—Mr. Hughes, cliii.
125. Impairment of Capital—Mr. Coote, exci.
125. Double liability of shareholders—Mr. Ladner, exliv, clxxxvi.
131. Note circulation redemption fund—Mr. Spencer, cl, elxxvi, clxxxv.
131. Priority of Government Deposits—Mr. Hodgins, elv., clxxxvi.
Schedule “ G ”—Assets—Mr. Garland, cli.
Limitations of loans—Mr. Coote, clviii, elxxxvili, clxxxix.
Notice of non-responsibility of Government—Mr. Coote, clvii, clyxxvi".
Bank Capital—Mr. Coote, exci, exevi.
Central Reserve Bank—Mr. Shaw, ix, exliv to exlvi, cli, clii, cliii, clxi.
Proposed amendment to Bankruptcy Act (adopted), pages xv, clxxxiv, clxxxv, excvii,
exeviii,
Proposed amendment to Post Office Savings Bank Act, pages clv, elxiii, clxxii.
GENERAL INDEX
Pagination in Roman numerals refers to Proceedings and Exhibits. Pagination in
Arabic numerals refers to Evidence.
Index to proposed amendments on preceding page.
AGRICULTURE :
Bankruptcy Act, application of—Mr. Tory,
294, 295.
AGRICULTURAL CREDIT
Alberta—Mr. Tory, cxvii to cxix, 233, 238,
243, 245, 246, 287, 288, 291, 292, 294 to
297.
Banks (Canada)—Mr. Neill, 268, 269, 272,
274, 282; Mr. Tory, 293. ;
British Columbia—Mr. Tory, ciii to cvi,
233, 238, 287, 288, 291, 292.
British Empire (Outside of Canada)—Mr.
Tory, Ixy to Ixxv, 208, 234, 235, 238. ;
Canada, generally—Mr. Tory, ciii to cxxvi,
208, 233 to 241, 244 to 247; Mr. Neill,
269; Mr. Tory, 287, 291 to 296.
Committee proceedings, 1923, referred—vii,
axe welive
Corporation (U.S.)—Mr. Pole, 133, 134;
Mire Rony. 225:
Debt Adjustment Bureau—Mr. Tory, 294,
295.
Europe—Mr. Tory, xlix to Ixiv, 208 to 211,
214, 231, 244, 290, 296.
Federal Land Banks (U.S.)—Mr. Tory, 211
fo; 2b 229)
Federal ‘Reserve Banks (U.S.)—Mr. Pole,
134.
Generally—Mr. Tory, xliii to lviii, exxi to
exxvi, 208, 209.
Interest Rates—Mr. Finlayson, 200; Mr.
Woy, 7a ie Pel Pale) ir, Pal. 224, 228,
2a0. to, 25.0200 to 239, 241 to 243: Mr.
Neill, 272, 274, 282; Mr. Tory, 286, 289,
290, 291, 296, 298; Mr. Ross, 320, 330, 331;
Mr. Saunders, 348, 349, 358, 375; Mr. Bill,
387, 392, 393, 396.
Legislation—Mr. Coote, clvi; Mr. Shaw,
elvii, elvili, elxi, clxix; Mr. Coote, clxxxvi,
exe Mir Tory, 239, 242, 243, 247, 248;
Mr. Neill, 268, 269; Mr. Tory, 286 to
290, 293, 294, 296 to 298. (See also “sub-
committee.”)
Manitoba—Mr. Tory, exii to exv, 233, 236,
238, 243, 287, 288, 291, 292, 294, 296, 298.
New Brunswick—Mr. Tory, cix, 233, 238,
287, 288, 297, 298.
Nova. Scotia—Mr. Mony* (eval ci, 233, 258,
287, 288.
Ontario—Mr. Won, Gis Wo) Oxi, ZBP, 2B)
238, 287, 288, 297.
Prince Edward Island—Mr. Tory, 233, 238,
287, 288.
Quebee—Mr. Tory, cvil, cvili, 233, 238, 287,
Referred to Committee—vi, 116.
Reports to House—xiii, XIV, CXCili, cxciv,
CXCVIl, ¢CXCViil.
Saskatchewan—Mr. Atornig, Ceal, Gaia, 233%,
236, 238, 245, 287, 288, 291, 292, 296.
Sub-committee on legislation—clvii, clviu,
elxi, clxix, clxxxiv, excii, exciii. (See also
“Legislation. )
Tory ‘Report—vi, xli to exxvi, exlili, exevil,
116, 207 to 249. eee
United States—Mr. Mony. lsxvaly to cur, Wir
Pole, 86, 144; Mr. Tory, 208, 210 to 233,
235, 236, 238, 240, 245 to 247, 287, 288 to
294, 296.
ALBERTA
Agricultural credit in—Mr. Tory, cxvii to
cxix, 233, 238, 243, 245, 246, 287, 288, 291,
292, 294 to 297.
AMENDMENTS
Bank Act of 1923—Mr. Edwards, 4, 8, 23, 24,
27 to 33; Mr. Saunders, 366, 383. (See
also “Audit.’’)
ASSOCIATION
See under “ Bank.”
AUDIT
Home Bank—Mr. Edwards, 8, 13, 14, 21, 25,
Pa, CU ee GRR Mle. Neill, 284: ‘Mr.
Edwards, 308 to lO Mare Ross, 318; Mr.
Saunders, 351 to 357.
Report to Finance Minister—Mr. Edwards,
8, 11, 12, 24, 25, 29, 34, 60; Mr. Williams,
161; Mr. Neill, 262, 289, 2835 Mire Ed-
wards, 308, 309; Mr. Saunders, 351, 352,
367, 363, 366.
. Shareholders’—Mr. Edwards, 7, 8, 24 to 32,
47, 49, 60; Mr. Pole, 95, 109 to ise 130
Mr. Williams, 160, 161; Mr. Neill, 250,
252, 263, 264, 276; Mr. ” Saunders, 383.
BANK, BANKS, BANKERS, BANKING
Act of 1923—Mr. Edwards, 4,8; 23: 24.27
to 383; Mr. Saunders, 366, 383.
Agricultural Credit (Canada)—Mr. Neill,
268, 269, 272, 274, 282: Mr. Tory, 283.
etek Sates eq Mr. Garland, cli;
Neill, 269, 270; Mr. Edwards, 302,
ae
Association—Mr, ves ach Bie) Wube,
Pole, 138, 139, 145; Neill, 249, 252,
ON PPA, PAB, 2765 to a 281, "985: Mr.
Tory, 293: Mr. Robb, 299 : Mr. Edwards,
304, 306, 311 to: 313, 316; Mr. Ross, 317
to 338; Mr. Saunders, 354 to 357, 364, 367,
369, 371, 381
Audits—Mr. Edwards, 7, 8, 11, 12, 24 to 32
34, 47, 49, 60; Mr. Pole, 95, 109 to 113,
130; Mr. Williams, 160, 161: Mr. Neill,
250, 252, 262 to 264, 276, 282, 283; Mr.
Edwards, 308, 309; Mr. Saunders, 351,
352, 357,308, 306, 383. (See also “In-
spection.”)
)
400
INDEX 401
Auditors’ Reports to Minister—Mr. Ed-
wards, 8, 11, 12, 24, 25, 29, 34, 60; Mr.
Williams, 161; Mr. Neill, 262, 282, 283;
Mr. Edwards, 308, 309.
Branches, Loans at—Mr. Edwards, 50, 58,
a 62; Mr. Stavert, 71 to 74; Mr. Neill,
5
Canada, in—Mr. Stavert, 73.
Capital—Mr. Coote, exci, exevi. Mr. Kd-
wards, 56, Mr: Pole, 99, 112; Mr. Wil-
liams, 158, 165; Mr. Neill, 254 to 257,
267, 278, 281; Mr. Edwards, 304 to 308,
310 to 312; Mr, Ross, 317, 321 to 327, 329,
330, 331, 334 to 336; Mr. Saunders, 350,
a02, 36l, 362, af0n 371, s803. (See. alsa
“Home Bank”).
Central Reserve—Report to House, ix, clii,
celui; Mr. Shaw, cxliv to exlvi, cli, clii,
elxi, 3; Mr. Edwards, 45, 46; Mr. Pole, 89,
90, 118; Mr. Shaw, 122 to 125, 132; Mr.
Pole, 140, 141, 145; Mr. Williams, 173,
1750) 180-" Mir een: 27 oes 282.6 2e3. 0) Mr.
Tory, 289; Mr. Robb, 300; Mr. Edwards,
310.
Circulation—See “Note circulation” under
this heading.
Currency—See “ Note” under this heading.
Deposit Centres—Mr. Neill, 265.
Deposits, Guarantee of—Report to House.
xiii; Exhibit, exxxvii; Mr. Ladner, exliv:
Mr. Shaw, exliv; Mr. Ladner, exlvii, clxi,
elxxxvi, clxxxix, exc; Mr. Edwards, 20,
33, 34, 38, 42, 43, 56: 57; Mir: Stavent, 71;
Mr Pole 96, 97, 99 to 105 1 Mr
Williams, 160, 169 to 172; Mr. Finlayson.
192, 198, 197, 198, 200 to 208; Mr. Neill
258 to 261, 274, 275, 278, 279; Mr. Finlay-
son, 339 to 343; Mr. Bill 397, 398.
Deposits, Government—Mr. Hodgins, clv,
elxxxvi; Mr. Edwards, 44; Mr. Stavert,
67 to 69; Mr. Pole, 113; Mr. Neill, 261;
Mr. Robb, 300; Mr. Finlayson, 339; Mr
Saunders, 376, 377, 379.
Deposits, Safety of—vi, vii, x, xi, exli, clviil,
. ¢lxin, clxx to clxxiv; Mr. Edwards, 5, 9
to 15, 19 to 38, 43, 48 ‘to 51, 53 to 57, 60;
Mr. Stavert, 64 to 67, 69 to 71; Mr. Vien,
(6-7, Mire Polewos. 10. tl 14 16" 117,
135. 144 to 147; Mr. Williams, 153, 157,
1599 160 160) to elbs, tno. lao, Leu: /ivir.
Robb, 185, 186; Mr. Finlayson, 187 to
205; Mr. Neill, 250 to 285; Mr. Robb,
299 to 301; Mr. Edwards, 304 to 306, 308
to 310, 312, 313, 315; Mr. Ross, 324 to 326,
332, 338, 338; Mr. Saunders, 351, 362 to
367, 383; Mr. Bill, 394, 395.
Directors, loans to—Report to House, xiv;
Mr. Garland, excii; Mr. Pole, 87; Mr.
Finlayson, 190, 191; (See also “ Limita-
tion of Loans”).
Harnings—Mr. Neill, 254, 255, 257, 267, 268,
280; Mr. Edwards, 303, 304.
Examination—See “ Inspection ”.
Exchange on cheques—Letter, 184.
Failures—Mr. Stavert, 62, 63; Mr. Pole, 88,
89, 92 to 95, 127, 128, 188; Mr. Williams.
1523 Io dor tov l66. 179° 83> Mire Pory,
224; Mr. Edwards, 302, 306, 307; Mr.
Finlayson, 338, 3389; (See also “ Home
Bank ”’);.
Federal Land (U.S.)—Mr. Tory, 211 to 215,
229.
Federal Reserve (US.)—Mr. Edwards, 45,
46, 49, 54: Mr. Stavert, 66; Mr. Pole,
77 to 79, 86, 89, 90, 97, 98, 106, 114, 117 to
122; 125, 128, 129, 133, 134, 137 to 141, 143,
145 to 149; Mr. Williams, 151 to 182; Mr.
Tory, 227 229, 230; Mr. Neill, 263, 264,
266, 267, 274, 284; Mr. Saunders, 355.
Head office—Mr. Edwards, 46,49, 50.,
Home—See Special Heading.
Inspection, Government (Canada)—Refer-
ence, vi, cxli; Report to House, x, x1;
Mr. Robb, clviii, clxiii, clxx to clxxiv;
Mr. Edwards, 9 to 15, 19 to 38, 438, 49,
58, 57, 60; Mr. Stavert, 64 to 66, 69 to 71;
Mr. Pole, 95, 110, 111, 114, 185, 144 to 147;
Mr. Williams, 159, 160, 166, 167, 181; Mr.
Robb, 185, 186; Mr. Finlayson, 187 to
205; Mr. Neill, 250 to 285; Mr. Robb,
299 to 301; Mr. Edwards, 304, 305,
308° to 310, 312, 313; Mr. Ross, 326, 332,
338; Mr. Saunders, 351, 362 to 367, 383.
Inspection, Internal—Mr. Edwards, 9, 10, 23
to 32, 49, 52, 60; Mr. Stavert, 64, 72; Mr.
Pole, 95, 96, 108 to 111, 113, 130; Mr. Wil-
liams, 160, 161, 168; Mr. Neill, 250, 263,
264, 281; Mr. Ross, 326, 327; Mr. Saun-
ders, 363.
Inspection, United States—Mr. Edwards, 23.
24, 43; Mr. Stavert, 69; Mr. Pole, 76 to
149; Mr. Williams, 151 to 182; Mr. Neill,
261, 262, 280; Mr. Robb, 300.
Interest Rates—Mr. Finlayson, 200; Mr.
Tory, 212 to 214, 216, 217, 221, 222, 294,
228; 2380 to 233, 235 ‘to 239 241 fo 243:
Mr. Neill, 272, 274, 282:; Mr. Tory, 286;
289 to 291, 296, 298: Mr. Ross, 320, 330,
331; Mr. Saunders, 348, 349, 358, 375;
Mr. Bill, 387, 392, 393, 396.
Loan Centres—Mr. Neill, 265.
Loans, Limitation of—Mr. Coote, clviii,
elxxxvili, clxxxix; Mr. Edwards, 50, 51:
Mr. Pole, 79 to 81, 137; Mr. Williams,
179, 182; Mr. Finlayson, 191, 193; Mr.
Neill, 274; Mr. Edwards, 314, 315; Mr.
Saunders, 361, 362, 365,
Loans, Real Estate, by—Mr. Pole, 81.
National system (U.S.)—Mr. Pole, 77 to
108, 110, 133, 137, 142; Mr. Williams. 151
io’ 2065 Mat Cory 621 ty, 227, 0220-0 Mr.
Neill, 263.
Note circulation—Mr. Spencer, cl; Mr.
Coote, elxvili, clxix; Mr. Spencer, elxxvi,
clxxxv; Mr. Coote, exev; Mr, Edwards.
44, 47, 48, 53, 54, 61, 62: Mr. Stavert:
66 to 68; Mr. Pole, 108, 144; Mr. Neill,
258;/ 259;'2615 266, 270 to 272,276, 278,
282; Mr. Robb, 300; Mr. Mdwards, 306,
310 to 316; Mr. Riess; 317 to 336: Mr.
Saunders, 350, 352, 356, 357, 359, 369 to
374, 376 to 383; Mr. Ross, 384, 385.
Pension Fund—Mr, Edwards, 4 to 6.
402
INDEX
BANK, BANKS, BANKERS, BANKING
Priorities—Mr. Hodgins, clv, clxxxvi; Mr.
Edwards, 44, 47, 48, 53, 54, 61; Mr.
Stavert, 66 to 69; Mr. Pole, 113; Mr.
Neill, 261, 271; Mr. Robb, 300; Mr.
Edwards, 310; Mr. Ross, 327; Mr. Fin-
layson, 339; Mr. Saunders, 376 to 380.
Profit and Loss account—Mr. Spencer,
exevl.
Shareholders’ audit—Mr. Edwards, 7, 8, 24
to 82, 47, 49, 60; Mr. Pole, 95, 109 to 113,
130; Mr. Williams, 160, 161; Mr. Neill,
250, 252, 263, 264, 276; Mr. Saunders, 383.
Shareholders’ double liability—Mr. Ladner,
exliv, clxxxvi; Mr. Edwards, 5, 6, 45, 48,
52, 58; Mr. Pole, 85, 89; Mr. Williams,
157 to 159, 164, 165, 168, 169, 174: Mr.
Finlayson, 192, 195; Mr. Neill, 255 to
258, 271, 272, 281; Mr. Edwards, 306 to
308.
State system (U.S.)—Mr. Pole, 76, 77, 90,
92, 96 to 101, 106, 108, 129, 183, 143; Mr.
Williams, 166, 172; Mr. Tory, 229; Mr.
Neill, 263.
Statement to Finance Department—Mr.
Edwards, 6, 7; Mr. Neill, 253, 254, 269;
Mr. Edwards, 301 to 305, 308, 309; Mr.
Ross, 321; Mr. Saunders, 365, 366, 380.
Stock Subscription—Mr. Coote, exev.
BANKRUPTCY ACT
Agriculture, applied to—Mr. Tory, 294, 295.
Report to House—xv; Mr. Shaw, elvii,
elxxiv, clxxxv, cxevil, excviii.
BRANCH OFFICES
Loans at—Mr. Edwards, 50, 58, 59, 62; Mr.
Stavert, 71 to 74; Mr. Neill, 265.
BRITISH COLUMBIA
Agricultural Credit—Mr. Tory, ciii to evi,
233, 238, 287, 288, 291, 292.
BRITISH EMPIRE (Outside Canada)
Agricultural Credit—Mr. Tory, Ixv to Ixxv,
208, 234, 235, 238.
CANADA
Agricultural Credit in—Mr. Tory, ciii to
exxvi, 208, 233 to 241, 244 to 247; Mr.
Neill, 269; Mr. Tory, 287, 291 to 296.
Bank Inspection—See under “ Inspection.”
Banks in—Mr. Stavert, 73.
Currency, Bank—See under “Note” and
pe amiiceg
Currency, National—Mr. Edwards, 61, 62:
Mr. Pole, 144; Mr. Neill, 261, 271, 276.
277, 282; Mr. Edwards, 310; Mr. Ross,
319 to 321, 334, 336; Mr. Saunders, 349,
353 to 355, 358, 374, 376 to 378; Mr. Ross,
384, 385. (See also “Bank circulation.”)
Gold Basis—Mr. Neill, 285, 286; Mr.
Saunders, 359, 360.
Gold Reserve—Mr. Pole, 145; Mr. Neill,
265 to 267, 275, 277, 282, 283; Mr. Ross,
318, 320, 330; Mr. Saunders, 349, 354, 355,
367, 376; Mr. Bill, 397, 398.
Government—See special heading.
Royal Mint—Mr. Neill, 283; Mr. Robb,
300; Mr, Saunders, 347, 352 to 354, 356,
310; oui.
Treasury Board—Mr. Pole, 138, 143, 145;
Mr. Neill, 277, 282; Mr. Ross, 318, 319,
326; Mr, Saunders, 344, 345, 347 to 349,
7, SiG:
CAPITAL
Bank—Mr. Edwards, 56; Mr. Pole, 99;
Mr. Neill; 254 to 257, 267, 278; Mr.
Edwards, 304 to 308, 310; Mr. Ross, 321,
322, 325 to 327; Mr. Saunders, 350, 361,
362. (See also “Home Bank.”)
Impairment of—Mr. Coote, exci; Mr. Pole,
112; Mr. Williams, 158, 165; Mr. Neill,
281: Mr. Edwards, 306, 310 to 312; Mr. |
Ross, 317, 821 to 327, 329 to 33], 334 to
336; Mr, Saunders, 350, 352, 370, 371, 380.
(See also “Home Bank.”)
Stock—Mr. Coote, exevi.
CENTRAL
Reserve Bank—Report to House, ix, clii,
cliii; Mr. Shaw, ecxliv, exlv, exlvi, cli, cli;
Mr. Coote, clxi; Discussion, 3; Mr.
Edwards, 45, 46; Mr. Pole, 89, 90, 118;
Mr.’ Vien; ‘ruling, 122 to 125, 132; Mr.
Pole, 140, 141, 145; Mr. Williams, 173,
175; 180; Mr. Neill, 275, 282,283; © Mr.
Tory, 289; Mr. Robb, 300; Mr. Edwards,
310.
COMMITTEE
Addresses to—clxviii, clxxvii, clxxviii, 384.
Agricultural Conditions of 1923—vii, ix, clv.
Agricultural Credits referred—vi, 116.
Bankruptcy Act considered by—xv, clvii,
clxxxiv, ¢clxxxv, ¢xcvii, Cxeviil.
Chairman, election of—75, 317.
Chairman’s Rulings—122, 123, 124.
Executive session in camera—clxxxi.
Home Bank sub-committee—exli, exlii, cxlvi,
clxu, elxviii, clxix, clxxxi to clxxxiii.
Procedure in—exlv, elxviii, elxx, clxxvii, 2.
Report to House (No. 4), recommending
leave to print—ix, exlv, exlvi, 2, 16, 115,
T1G; 131;
Report to House (No. 5), recommending
leave to sit while House in sesslon—ix,
exlvii, 18.
COMMITTEE
Report to House, (No.
Bank—ix, clii, chii, clxii.
Report to House (No. 7), recommending
reference of Agricultural Conditions Com-
mittee, 1923, Report—ix, elv.
Report to House (No. 10), Inspection of
Banks—x, xi, clxxiv to clxxvi.
Report to House (No. 11), re Home Bank—
XU, xili, clxxxii, elxxxiil,
Report to House (No. 12), re Guarantee of
Deposits—xiii, exe.
Report to House (No. 13), re Agricultural
Credit—xili, xiv, exciii, exciv.
Report to House (No. 14), re Loans to
Bank Directors—xiv, excii.
6), re Central
INDEX
403
Report to House (No. 16), re Proceedings—
xiv, Cxevil.
Report to House (No. 17), re Bankruptcy
Act—xv, exevil, excevili.
Reporting of Evidence—exlix, cl; Mr. Coote,
elviii, clxxxvili, 16, 75.
Tory Report referred to—vi, exliii, 116.
COMPTROLLER OF CURRENCY
Powers of—Mr. Pole, 111,
Williams, 155, 157; Mr. Edwards,
(See also “ Finance Minister”).
313;
CREDIT
Agricultural _Corporation—Mr.
134; Mr. Tory, 225.
Control of—Mr. Edwards,
Pole, 122, 137, 142, 146, 148; Mr. Wil-
liams, 162, 163, ilies Mego eed, to 180; Mr.
Finlayson, 193; Mr. Tory, 232, 239, 242)
9A7, 249; Mr. Neill, 272, 274, 276; Mr.
Saunders, 249; Sao, ovo
terest "’).
CURRENCY
Bank—See “ Note circulation” and “ Bank ”.
Comptroller of—Mr. Pole, 111, 112, 139; Mr.
Williams, 155, 157; Mr. Edwards, Beis
(See also “ Finance Minister ”’).
National, Canadian—Mr. Edwards, 61, 62;
Mr. Pole, 144; Mr. Neill, 261, 271, 276,
277, 282: Mr. Edwards, 310; Mr. Ross,
319 to 321, 334, 336; Mr. Saunders, 349,
353 to 355, 358, 374, 376 to 378; Mr. Ross,
384, 385. (See also “ Note circulation.’’)
National, United States—Mr. Edwards, 46
53, 54; Mr. Pole, 98, 99, 118, 125 to 127,
Pole, 133.
(See also “ In-
136, 138; Mr. Williams, 177 to 179; Mr.
Saunders, 353, 354.
DEBT
Adjustment Bureau—Mr. Tory, 294, 295.
DEPOSITS
Acceptance, limiting of—Mr. Garland, exev.
DEPOSITS
Bank, Safety of—vi, vii, x, xi, cxli, clviii,
elxili, clxx to elxxiv; Mr. Edwards, 5, 9
to 15, 19 to 38, 43, 48 to 51, 53 to 57, 60;
Mr. Stavert, 64 to 67, 69 to 71; Mr. Vien,
"6; Mir Poles 95, 110), 001) 114, 116.117,
135, 144 to 147; Mr. Williams, 153, 157,
159: 160. 166° to 168, 175,179; 18h Mr.
Robb, 185, 186; Mr. Finlayson, 187 to
205; Mr. Neill, 250 to 285; Mr. Robb,
299 to 301; Mr. Edwards, 304 to 306, 308
fovslO. S12 vale. olde Mires Ross .o24 to
326, 332, 333, 338; Mr. Saunders, 351,
362 to. 367, 383; Mr. Bill, 394, 395.
Centres—Mr. Neill, 265.
Guarantee of—Report to House, xiii;
hibit, exxxvii® Mr. Ladner, cxliv;
Shaw, exliv; Mr. Ladner, exlvii, clxi,
elxxxvi, elxxxix, exc; Mr. Edwards, 20.
33, 34, 38; 42, 48, 56, 57; Mr-Stavert, 71;
Mr. Pole, 96, 97, 99 to 104, 111; Mr. Wil-
liams, 160, 169 to 172; Mr Finlayson, 192
Ex-
Mr.
112, 139; Mr.}i
33, 37, 46; Mr.|.
193, 197, 198, 200 to 203; Mr. Neill, 258
to 261, 284, 275, 278, 279; Mr. Finlayson.
339 to 343; Mr. Bill, 397, 398.
Government—Mr. Hodgins, clv, elxxxvi;
Mr. Edwards, 44; Mr. Stavert, 67 to 69;
Mr. Pole, 113; Mr. Neill, 261; Mr. Robb,
300; Mr. Finlayson, 339; Mr. Saunders,
376, 37%, 379.
Home Bank Committee—cliv, elxi, clxu,
elxiv to clxviii, clxxx, clxxxi; Mr. Lee,
383, 384.
EARNINGS
Bank—Mr. Neill, 254, 255, 257, 267, 268, 280;
Mr. Edwards, 308, 304.
EUROPE
Agricultural Credit in—Mr, Tory, xliv to
Iriv, 208" to: 211, 214, 231, 244° 290)" 296.
EXCHANGE
Bank, on cheques—Letter, 184
EXHIBITS
List of—exxvii.
FEDERAL
Reserve system (U.S.)—See under “ Bank”.
FINANCE
Act, Application of—Mr. McQuarrie, elvii,
elxi; Mr. Edwards, 46, 55; Mr. Pole, 128,
129, 132, 133, 137 to 140, 143 to 146; Mr.
Williams, 180, 181; Mr. Tory, 240; Mr.
Neill, 264 to 267, 272, 277, 282 to 284;
Mr. Tory, 289; Mr. Robb, 301; Mr. Ross,
318 to 321, 326 to 328; Mr. Saunders, 343
to 349, 354 to 356, 358, 360, 361, 368, 375,
376, 379.
Minister, auditors’ report to—Mr. Edwards,
8, 11, 12, 24, 25, 29, 34, 60; Mr. Williams,
161; Mr. Neill, 262, 282, 283; Mr. Ed-
wards, 308, 309.
FINANCE
Minister, powers of—Mr. Edwards, 8 to 14,
21, 24,25, (28, 29,32, 34,60: ‘Mr. Pole,
139; Mr. Williams, 161; Letter, 184; Mr.
Finlayson, 192; Mr. Neill, 250 to 252, 262,
L280) tor 28a 2805 | Mine meee 300; Mr.
Edwards, 808, 309, 311; Ross, 322,
326; Mr. Saunders, pols oe 354, 357, 363,
364, 366, 367, 374, 381, 383.
GOLD
Basis, Canada—Mr. Neill, 285, 286; Mr.
Saunders, 359, 360.
Reserve, Canadian—Mr. Pole, 145; Mr.
Neill, 265 to 267,275, 277, 282, 283: Mr.
Ross, 318, 320, 330; Mr. Saunders, 349, 354,
355, 367, 376: Mr. Bill, 397, 398.
Recenve. United States—Mr. Pole, 118; Mr.
Williams, 180, 181; Mr. Saunders, 355.
GOVERNMENT
Bank Inspection—See
“ Notice.”
Deposits, priority of—Mr.
elxxxvi; Mr. Edwards, 44;
“Tnspection” and
Hodgins, lv,
Mr. Stavert,
404
INDEX
67 to 69; Mr. Pole, 113; Mr. Neill, 261;
Mr. Robb, 300; Mr. Finlayson, 339; Mr.
Saunders, 376, 377, 379.
Savings Banks—Mr. Pole, 104, 105; Mr.
Walltams., 172; ,) Mr: Robb; 30053), Mr.
Saunders, 369, 370; Mr. Bill, 398. (See
also under “ Post Office.’’)
GUARANTEE
Deposits, of—See under “ Bank” and “ De-
posits.”
TENSVAID) OPC, 4?
Bank’s, deposit not made in—Mr. Edwards
50.
Bank’s, loans not made by—Mr. Edwards
50.
Bank’s reserve—Mr. Edwards, 46, 49.
HOME BANK
Addresses to Committee—clxviil,
elxxvill, 384.
Audit of—Mr. Edwards, 8, 13, 14, 21, 25, 26,
41, 42, 53; Mr. Neill, 284; Mr. Edwards,
308 to 310; Mr. Ross, 318; Mr, Saunders.
elxxvil,
all, Sb.
Bankers’ Association member—Mr. Ross,
ala FOr aoe: :
Depositors’ Relief Committee—cliv, elxi,
cla clay ito ebxval,, che. siclmxxi ) Mir:
Lee, 383, 384.
Finance Minister, responsibility of—Mr.
Edwards, 21.
Financial strength—Mr, Edwards, 8; Mr.
Finlayson, 194; Mr. Neill, 249 to 252, 284,
285; Mr. Edwards, 306, 310 to 312, 315;
MirstRoss, ahz 3l8; o2ie tora2a, salto 335,
Mr. Saunders, 350, 362, 370 to 374.
Liquidator’s Report—elxxviii to clxxx.
McKeown Report (Reprinted)—xvii to xl,
exliii; Mr. Neill, 284; Mr. Ross, 322, 323;
Mr. Saunders, 370 to 374, 380.
Reference—vi, vii, exli, clxii, 116, 117.
Reports to House—x to xiii, clxxxiil, excv.
Shareholders’ Committee—cliv, clxxviil.
Sub-committee—exli, exlii, exlvi, clxii, clxviti,
elxix, elxxxi to elxxxiii.
INSPECTION
Government, Canada—Reference, vi; Re-
pon. to. douse, x, sa Mir Robby cxli,
elvill, clxii, clxx to clxxiv; Mr. Edwards,
OF tors OMe: 38540749) dona) Om. ire
Stavert, 64 to 66, 69 to 71; Mr. Pole, 95,
OT ASS. 1447 tomlad Nie aWal-
liams, 159, 160, 166, 167, 181, 185, 186; Mr.
Finlayson, 187 to 205; Mr. Neill, 250 to
285; Mr. Robb, 299 to 301; Mr. Edwards.
304, 305, 308 to 310, 312, 313; Mr. Ross,
326, 332, 338; Mr. Saunders, 351, 362 to
367, 383.
Government, United States—Mr. Edwards,
23, 24, 43; Mr. Stavert, 69; Mr. Pole, 76
to 149; Mr. Williams, 151 to 182; Mr.
Neill, 261, 262, 280; Mr. Robb, 300.
Internal by bank officers—Mr. Edwards, 9,
10, 23 to 32, 49, 52, 60; Mr. Stavert, 64,
72; Mr. Pole, 95, 96, 108.to 111, 113, 130;
Mr. Williams, 160, 161, 168; Mr. Neill,
250, 263, 264, 281; Mr. Ross, 326, 327;
Mr. Saunders, 363.
Trust and Loan Companies—Mr. Finlayson,
187 to 205. :
INSURANCE
Deposits, of—See under “Deposits” and
“ Bank.”
INTEREST
Rate—Mr. Finlayson, 200; Mr. Tory, 212 to
14 DiGe Qin 22, 2228 224°) 225) a0) 00
233, 235 to 239, 241 to 243; Mr. Neill, 272,
274, 282; Mr. Tory, 286, 289 to 291, 296,
298: Mr. Ross, 320, 330, 331; Mr. Saun-
ders, 348, 349, 358, 375; Mr. Bill, 387, 392,
393, 396.
LEGISLATION—
Agricultural Credit—Mr. Coote, elvi; Mr.
Shaw, celvii, elviii, clxi, clxix; Mr. Coote,
elxxxvi, excv; Mr. Tory, 239, 242, 243, 247,
248; Mr. Neill, 268, 269; Mr. Tory, 286
to 290, 293, 294, 296 to 298. (See also
“United States.”)
LIABILITY
Shareholders’ double—Mr. Ladner, exliv,
elxxxvi; Mr. Edwards, 5, 6, 45, 48, 52, 58;
Mr. Pole, 85, 89; Mr. Williams, 157 to
159, 164, 165, 168, 169, 174; Mr. Finlay-
son,, 192; 195; Mr. Neill, 255 to 258, 271,
272, 281; Mr. Edwards, 306 to 308.
LOANS
Bank branch offices—Mr. Edwards, 50, 58,
59, 62; Mr. Stavert, 71 to 74; Mr. Neill,
265.
Centres, bank—Mr. Neill, 265.
Directors, to—Report to House, xiv; Mr.
Garland, cxcii; Mr. Pole, 87; Mr. Fin-
layson, 190, 191.
Limitation of—Mr. Coote, elviii, clxxxviii,
clxxxix; Mr. Edwards, 50, 51; Mr. Pole,
“9 to 81; 137; Mr. Williamssi79s S25
Mr. Finlayson, 191, 198; Mr. Neill, 274:
Mr. Edwards, 314, 315; Mr. Saunders,
361, 362, 365
Real Estate by banks—Mr. Pole, 81.
McKEOWN REPORT
Home Bank—xvii to xl, exliii;
244; Mr Ross, 322, 323)
370 to 374, 380.
MANITOBA
Agricultural Credit in—Mr. Tory, exii to
cxv, 233, 236, 238, 243, 287, 288, 291, 292,
294, 296, 298.
NATIONAL
Banks, United States—See under “ Banks.”
NEW BRUNSWICK
Agricultural Credit in—Mr. Tory, cix, 233,
238, 239, 287, 288, 297, 298.
Mr. Neill,
Mr. Saunders,
ee
INDEX 405
NOTE CIRCULATION QUEBEC ne
Bank—Mr. Coote, elxviii, clxix, exev; Mr.| Agricultural credit in—Mr. Tory, evi, evil,
Edwards, 48, 54, 61, 62; Mr. Pole, 144;
Mr. Neill, 261, 266, 276, 282; Mr. Robb,
300; Mr. Edwards, 306, 310 to 316; Mr.
Ross, 317 to 336; Mr. Saunders, 350, 352,
356, 357, 359, 369 to 374, 377, 378, 380 to
383; Mr. Ross, 384, 385.
Priority of holders—Mr. Edwards, 44, 47, 48,
53, 61; Mr. Stavert, 66, 67; Mr. Neill,
261, 271; Mr. Edwards, 310;' Mr. Ross.
327; Mr. Saunders, 376, 377, 379.
Redemption Fund—Mr. Spencer, cl, elxxvi
clxxxv; Mr. Edwards, 44, 48, 54, 61; Mr
Stavert, 66 to 68; Mr. Pole, 103; Mr.
P Weill 258,259, 270) to, 272, 278. Mr.
Saunders, 373, 374, 378, 379.
NOTICE
Banks, in, of deposits and loans—Mr. Coote,
elvii, clxxxvii.
Government, of non-responsibility of—Mr.
Coote, clvii, elxxxvii; Mr. Stavert, 74.
Intention to give security—Mr. Spencer,
clxui, clxxxix; Mr, Edwards, 4; Mr.
Saunders, 363, 364.
NOVA SCOTIA
Agricultural Credit in—Mr. Tory, eviii, cix,
233, 238, 287, 288.
ONTARIO
Agricultural Credit in—Mr. Tory, cix to
CXll, 232, 233, 238, 287, 288.
Provincial Savings Bank—Mr. MacLean,
clxix, clxxii, exc; Mr. Edwards, 38:
Mr. Finlayson, ‘201, Mr. Saunders, 370.
PENSION
Bank employees’ fund—Mr. Edwards, 4 to 6.
POST OFFICE
Savings Bank—Mr. MacLean,
celxxil; Mr. Edwards, 38; Mr. Pole, 105,
Mr. Williams, 172, 173; Mr. Saunders,
369, 370, 377; Mr. Bill, 385 to 398.
PRIORITY
Assets of bank—Mr. Edwards, 44; Mr.
Stavert, 67 to 69; Mr. Saunders, 376, 378
to 380.
Bank note holders—Mr. Edwards, 44, 47, 48,
53, 54, 61; Mr. Stavert, 66, 67; Mr. Neill,
261, 271; Mr. Edwards, 310; Mr. Ross,
327: Mr. Saunders, 376, 377, 379.
Government Deposits—Mr. Hodgins,
elxxxvi; Mr. Edwards, 44; Mr. Stavert,
67 to 69; Mr. Pole, 113; Mr, Neill, 261;
Mr. Robb, 300 ; Mr. Finlayson, 339: Mr.
Saunders, 376, 377, 379.
PRINCE EDWARD ISLAND
‘Agricultural Credit in—Mr. Tory, 233, 238,
287, 288.
PROFIT AND LOSS
Bank account—Mr. Spencer, excvi.
elv, clxiii,
elv,
233, 238, 287, 288.
REAL ESTATE
Loans by banks—Mr. Pole, 81.
REPORTS TO HOUSE
Agricultural Credit (No. 13)—wxi, xiv.
Bankruptcy Act, (No. 17)—xv.
Central Reserve Bank (No. 6)—ix.
Guarantee of Deposits (No. 12)—xiu.
Government Inspection (No. 10)—ix, x, xi.
Home Bank (No. 11)—xu, xii.
Loans to Directors (No. 14)—xiv.
ROYAL MINT
Canada—Mr. Neill, 283; Mr. Robb, 300;
Mr. Saunders, 347, 352 to 354, 356, 376,
377.
SAFETY
Deposits—See “ Deposits” under “ Bank”.
SALE
Bank shares—Mr. Shaw, exc.
SASKATCHEWAN
Agricultural Credit in—Mr. Tory, exvi,
CXVii, 233, 236, 238, 245, 287, 291, 292, 296.
SAVINGS BANKS
Government—Mr. Pole, 104, 105; Mr. Wil-
liams, 172; Mr. Robb, 300; Mr. Saunders,
369, 370; Mr. Bill, 393.
Ontario Provincia—Mr. MacLean, elxix,
elxxil, exe; Mr. Edwards, 38; Mr. Finlay-
son, 201; Mr. Saunders, 370.
Post Office—Mr. MacLean, clv, elxiii, elxxii;
Mr. Edwards, 38; Mr. Pole, 165; Mr. Wil-
liams): 172) ee Mire Saunders, 369, 370,
377; Mr. Bill, 385 to 398.
SCHEDULE “G”
Bank Act—Mr. Garland, cli;
270; Mr. Edwards, 302, 303.
SHARES, SHAREHOLDERS
Audit—Mr. Edwards, 7, 8, 24 to 32, 47, 49,
60; Mr. Pole, 95, 109 iy IIB BOS YW te
Williams, 160, 161; Neill, 250, 252,
263, 264, 276 : Mr. anes 383.
Double liability—Mr. Ladner, exliv, clxxxvi;
Mr. Edwards, 5, 6, 45, 48, S25 5Se Mr.
Pole, 85, 89; Mr. Williams, 157 to 159,
164, 165, 168, 169s 4s Mr. Finlayson,
192, 195; Mr. Neill, 255 to 258, 271, 272,
281; Mr. Edwards, 306 to 308.
Home Bank—cliv, elxxviii.
Sale of—Mr. Shaw, exe.
Stock Subscription——Mr, Coote, exey.
Transfer of—Mr. Hughes, cliii.
STATE
Banks (U.S.)—See under
STATEMENT
Finance Department, to—Mr. Edwards, 6,
7; Mr. Neill, 253, 254, 269; Mr. Edwards,
Mr. Neill, 269,
= Bankes
406
INDEX
301 to 305, 308, 309; Mr. Ross, 321; Mr |
Saunders, 365, 366, 380.
TORY REPROD
Reference to Committee—vi, xli to cxxvi,
exlili, exevii, 116, 207 to 249.
TREASURY BOARD
Canada—Mr. Pole, 138, 143, 145; Mr. Neill.
Zi, 292;. Mr ‘Ross, 318% 319) 3262 Mr.
Saunders, 344, 345, 347 to 340, 375, 376.
TRUST AND LOAN COMPANIES
Inspection of—Mr. Finlayson, 187 to 205.
UNITED STATES
Agricultural Credit in—Mr. Tory, Ixxvi to
cul; Mr. Pole, 86, 183, 184, 144; Mr. Tory,
207, 208, 210 to 233, 235, 236, 238, 240,
245 to 247, 287, 288, 291 to 294, 296.
Bank Inspection in—Mr. Edwards, 23, 24, 43;
Mr. Stavert, 69; Mr. Pole, 76. to 149;
Mr. Williams, 151 to 182; Mr. Neill, 261,
262, 280; Mr. Robb, 300.
Comptroller of Currency—Mr. Pole, 111,
112, 139; Mr. Williams, 155, 157; Mr. Ed-
wards, 313.
Curreney—Mr. Edwards, 46, 53, 54; Mr.
Pole, 98, 99, 118, 125 to 127, 136, 138; Mr.
Williams, 177 to 179; Mr. Saunders, 353,
354: (See also “Federal Reserve U. S.”).
Gold Reserve—Mr. Pole, 118; Mr. Williams,
180, 181; Mr. Saunders, 355.
WITNESSES
List of—cxxvii.
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